Pay for performance systems need to support corporate performance

by on June 26, 2009 · 0 Comment POSTED IN: HR Info Center

Pay for performance systems need to emphasize and rewards individual, team and corporate performance gains.

The goal with pay for performance systems is to be better than average and they payout their annual profit-sharing plan based on the bank being better than average. And it’s a way of really focusing on continually improving what they’re trying to do.

At Handelsbanken( a top Swedish based bank in Europe), if you’re above average, everybody in the company gets a stock bonus, a stock plan that pays out much like a profit-sharing. The results on that have been pretty phenomenal in terms of what their results have been.

If you had been in the plan since its formation back in the 70’s, by 2000, you’d accumulated $430,000 in terms of what’s out there. So, it’s been a pretty good payout for them as well.

Supporting rewards in pay for performance systems
Pay for performance systems need to ensure that the rewards support the company value. When I’m looking at relative rewards, people often think about a measure and often a measure is not a good way to tackle it. So, you want to make sure it supports the company values.

Companies in their pay for performance plan need to look at weighting factor in terms of evaluation. They weighted their performance based on growth versus the prior year, growth versus the competition, profit for the prior year against the competition. They also wanted some working capital measures to look at debt versus the prior year. Would they be able to pay down debt?

Quality factors in pay for performance.
Some of these factors are not as quantitative so you have to factor some of the other things that are important to performance, but not, in many cases, as measurable as some of the peer financial information.

Each of these factors we’re giving a weighting and then score in terms of how well they did. And that results in the performance evaluation to ensure that — making sure my rewards and my compensation track with how well I’m executing my strategy.

Edited remarks from the Rapid Learning Institute webinar: “How to Avoid Incentive Pay Plan Disasters” by Steve Player

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