Tuesday, January 8, 2008

Paying for Performance -- Making Incentive Compensation Systems Work

A lot has been said and written about "Paying for Performance". In most organizations, very little has been done. In fact, in some companies the compensation system has become so misaligned with the objectives that it actually becomes part of the problem.

Why might that be? In most cases, failure of company management (or owners) to commit.

A friend of mine is a true believer in the use of incentive systems to drive his business, and he's been hugely successful in doing so. His business has outstripped his rivals in growth, profitability, customer satisfaction and key manager retention. He even improved cash flow by incentivizing his accounts receivable department! How does he do it?

In his words: "Figure out exactly what you want an employee (or group of employees with like responsibilities) to do, and then figure out exactly how to pay them for doing just that. Then figure out how you'd "game" that system if it applied to yourself and build in some checks and balances for those possibilities."

He goes on to say that "If you're paying people by the hour, week or month, you're not paying them for what you want them to do -- you're paying them for the pleasure of their company. As long as you keep paying them, they'll keep coming around and doing mostly the same things." The corollary to "Do more of what you've been doing and you'll get more of what you've been getting."

So, what's the failure to commit that I've observed? It's the part about figuring out exactly what you want them to do, and committing to that direction. In many companies the plans and strategies are in the heads (or guts) of the leaders. They won't (not that they can't) set aside the time to focus on and commit to the goals and objectives for, say, the next year. That's what's required -- that you develop a crystallized vision of what you want a particular part of the business to accomplish, decide how you're going to measure those results, and commit to the idea that those results are important enough to pay people for. You want to align their self-interests with the interests of the company -- a powerful force in nature, and also in organizations.

Of course, you build the numerical side of the incentive calculation such that the company makes some multiple of what's paid for the result, which means that the more they accomplish the more they get paid and the more money you make. Everyone wins.

Here are the basics of effectively "Paying for Performance":

  • Clearly define the goals and performance objectives of the company and of the group you'd like to incentivize
  • Clearly define exactly what you want them to do in quantifiable terms
  • Build a compensation model that pays them for doing exactly that
  • Test the model by seeing how you'd "game" it if it applied to you
  • Build some "checks and balances" into the model to avert gamesmanship
  • Launch the program in a manner that allows them to "win" -- a progressive implementation that provides some time to acclimate to the new concept of being paid for results, rather than the pleasure of their company

We'll explore the "how to" of these steps in future articles.

Terry Weaver
Chief Executive Boards International
864 527-5917
Chief Executive Boards International: Freedom for business owners & CEOs -- Less Work, More Money, More Freedom to enjoy it

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