In pay for performance, results not efforts should be rewarded

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

Pay for performance metrics only rewards bottom line results.

Startup mode and pay for performance
Generally speaking, when in start up mode it maybe perfectly appropriate to have activity-based rewards in your pay for performance system. We may have an activity that we need to reward that will lead to gaining additional capital – funding capital. We may not have the systems in place to appropriately track the results yet on a specific enough basis. And we just have the ability to track activity at this point.
In start up mode, activity is what our investors are looking for with the anticipation that results will come down the road. Accordingly those are the types of things that we want to reward

“Can you afford to pay for performance without results?”
I would argue in most cases that even if you can afford to pay for performance without results, oftentimes those payments should not occur. And it kind of brings in my personal compensation clause, which is to demand activity and pay for results.

In other words, if an employee is not performing, they’re not hitting their individual objectives, oftentimes the best practice is for their manager or supervisor to sit down and look at their activity. And make sure that they’re doing the things that they have inputs that are needed. But what we’re actually going to pay for, what we’re going to reward is the output.

In pay for performance, bonuses are for performers
In other words, we’re not going to pay somebody of bonus because they’re trying very hard. But if somebody isn’t trying very hard but they happen to have that natural talent, they happen to have God-given ability that they’re driving results without trying, we need to pay for those results.

Low base pay means a much higher pay for performance rate
Another instance where compensation philosophy can come into this decision is some organizations may choose on the base salary side to pay below market competitive rate. So, we may choose that we’re going to set our base salaries at the 25th percentile of the market.

We know that a full 75% of our competitors pay more than we do on base pay. In that case it may make sense to pay for activities at least up to the point where we’re market competitive on the base side. In other words, typically your based salary covers the activities – that covers the effort.

The bonus will oftentimes cover the result side of that equation. And so, for under-compensating on the base side, for under-compensating on the activity side, it may make sense to at least tie part of our incentive to those activities until we get at least to that market competitive level.

And I’ll just add to that. A recent example I experienced and that was this company did not hit the revenue and profitability targets. And they had completed a lot of activities regarding merger, infrastructure, additions and things like that which were all great things.
But the results weren’t there and should they or should they not have been paid. They said they all worked the hardest they’ve ever worked in their career but the results weren’t there.

So, that situation happens a lot. And the question is, is that one of those things that you have to answer is, “Is it an industry wide issue or is it a company specific issue?” And sometimes that can come into play when you determine where did – those bonuses were actually earned.

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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