Are you Really Paying for Performance?

January 28, 2016

Flat compensation means variable, performance based pay has become an important way to meaningfully reward the outstanding. Its growing importance ups the ante for making it as effective as possible and aligning payouts with desired results.

Businesses typically operate in separate but connected functions and optimum results depend upon the performance of every group being on target. One group should not excel at the expense of another. They must work in tandem for the best results.

Horizontal collaboration and achievement is as critical as vertical success. Failure in one area has consequences for another and understanding and incentivizing the linkage will motivate improved teamwork and departmental collaboration. Dan Walters at the Compensation Cafe has used airlines to describe how baggage check does not work in tandem with security or boarding to enhance customer experience.

Some companies address this through holistic gain sharing assuming that if everyone is paid on the same basis and encouraged to work together they will figure out where the blockages are and fix them. Others are more prescriptive linking individuals, teams, or departments with specific measures and attached compensation.

Knowledge@Wharton recently featured an article by Professor Adam Grant on employee motivation and the importance of what he calls "task significance" and the impact a role has on that of others. He argues that understanding this can measurably impact employee performance and productivity. 

Employees need to know how their work benefits those who depend upon it. This creates a human connection and influences higher levels of performance and a foundation for sharing economic results through incentives.

Typically employee communication focuses on how roles impact top down business priorities. This needs to be supplemented with appreciation of how, collaboration to deal with challenges can add even greater value and in turn, lead to more variable pay.

Employees notoriously follow the money trail created by their employers and so collaborative or joint objectives must be backed up with clear targets, an explanation of the mechanics and the behaviors that will lead to higher pay.

Incentives are under optimized when focused only on discreet outcomes. Encouraging behaviors reinforces an employee's "place in the world" and a human connection to their work. Purpose drives performance and its rewards.

Discretionary awards question the commitment to goal based performance and will be less acceptable as new generations populate the workforce and expect greater transparency.

When evaluating the success of incentive plans pay special attention to examining how awards contribute to helping or hindering collaboration and the success of others. 

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