Your company's growth and evolution should determine your pay for performance metrics

by on June 23, 2009 · 0 Comment POSTED IN: HR Info Center

The misalignment of pay for performance metrics will cost you in the end

We’ve listed some typical pay for performance measures based on where you are in that business cycle. The focus start on the development stage

What are Pay for performance metrics based on?
Basically when you’re looking at development, the development phase generally that’s zero to three years. you’re looking at revenue growth and that really enhances the value of the company. Because basically the revenue growth is a stamp of approval from the marketplace that your product has merit and they will buy it at the prevailing price.

Now as you move into the growth stage with pay for performance, then you start mixing in more profitability with the revenue growth. So, obviously, during the first three years of development, you may start in your four adding a 25% element of profitability to your performance measures. This is taking about annual incentives but some of these maybe tied to long-term incentives and we’ll touch on that at the end. But as you move through this, you certainly don’t want to be in the maturity phase and tied to revenue growth. Because you do need to be earning cash, you do need to be profitable at that stage.

Growth phase and the pay for performance metrics
Starting on year four you should be moving into the growth phase and you could stay in the growth phase until your revenue growth slows to something less than two times the consumer price index increases.

So, for example, if you expect 3.5% increase in the consumer price index, if our revenue growth is not at least 7%, we’re probably starting to slide out of that growth mode and into the maturity mode.

And obviously, when the industry and the company starts declining the profitability shrinks, the margin shrink, the revenue may actually decline. And that maybe a function of the industry or it maybe a function of the business. So, that’s something to keep in mind.

You know, certainly if you’re in the printing business that’s probably at the peak of maturity and decline and may actually be on the decline phase. So, cash flow, EBITDA, those are kinds of terms are appropriate for your performance measures.

Edited remarks from the Rapid Learning Institute webinar “Incentive Pay Plan Blunders That Can Cost You a Fortune.” By Kevin Nussbaum and Ed Rataj

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