Goal communication is key in pay for performance

by on June 17, 2009 · 0 Comment POSTED IN: HR Info Center

Set incentives need to be your driver in pay for performance

Communication is kind of a recurring theme in pay for performance. But here, I want to make the distinction between a bonus and an incentive. Essentially, if you look at bonuses and incentives, those words are often used interchangeably.

But if you start to think about what those actual words mean, a bonus and an incentive, I’ve started to change my internal definitions in my mind. And let me explain why because I think it’s important from a big picture perspective in pay for performance plan design.

Pay for performance and incentives
At the end of the year, does your employee look at the check that they received – the incentive check, the bonus check that they receive, and do they understand, “Hey, they told me at the beginning of the year that if we achieved X,Y and Z, that I would be receiving a payment in this amount.”

If so, that would be an incentive. I knew at the beginning of the year what I needed to do and they told me what was in it for me. I had an incentive that was clearly communicated to me at the beginning of the year as to what I needed to achieve and what I would receive out of it.

Bonuses and pay for performance
At the other end of that spectrum, a bonus, it may be the exact same dollar amount but if the employees are kind of shrugging their shoulders and saying, “Well, I don’t know. I guess we performed pretty well this year. I have an extra $3,000, an extra $30,000.” The amount really doesn’t matter. It’s the communication and the understanding of the employee as to why they are receiving these dollars.

Make incentives your driver in pay for performance compensation
In order to drive pay for performance towards the incentive end of that spectrum, a number of things are important. We’re removing the discretion. We can also communicate how is our performance compared to targets. Even within a privately held company, we can communicate, “Are we on target to hit our goals this year? Are we not on target to hit our goals?”

In a publicly traded environment, this is often much easier to do. It’s already being communicated to the street. But in a privately held company, if we’re going to properly design these metrics, we need to also communicate how are we doing, what can we do better. And if we’re behind our target, how can we move forward and work towards that target level of performance?

Edited remarks from the Rapid Learning Institute webinar: “Incentive Pay Plan Blunders That Can Cost You a Fortune” by Ed Rataj

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