Manage activity and pay for results in a pay for performance system

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

Bottom line results are what you reward in a pay for performance system

This can be a particularly easy trap to fall into in pay for performance system or sales incentive plan design but you can see it across other parts of the organization as well.

I’m going to work backwards and I would start by saying my philosophy and really a best practice would be to manage activity but to pay for results. Another way of saying that is that bonuses should not be paid based on hard work. Pay for performance system bonuses should be based on the results of that work.

A pay for performance system should not reward activity
So, if we’re talking about two sales people for example. One of them is working very hard. They’re working 80 hours a week. They are making follow-up phone calls. They are sending out 30 emails an hour, doing everything that we ask them to. In fact, they’re doubling the efforts that we’re asking them to put out but they aren’t selling a thing to save their lives. For whatever reason, they’re not closing the sales. I would argue they should not be rewarded for that.

If you have another sales person who’s sitting right next to him who’s doing half of what we’re asking them to do. They’re only making a couple of phone calls. And in fact, they spend most of their time on the golf course schmoozing clients. They can be considered as much of a professional golfer than a sales person.

But when you look at the results, they’re fantastic. They’re selling $5 million a year of whatever we’re selling where our average sales person is selling $1 million a year. They should receive a very large incentive because the results are there.

Activity usually equates to results with pay for performance system
Now when I say manage activity in a pay for performance system, the head of sales, the vice president of sales when looking at why is somebody successful or not successful oftentimes, they’ll look at that activity. How many phone calls are you making? What are the efforts that are going in? What are the inputs? Because oftentimes, if the inputs are out of balance then the outputs will be out of balance as well.

So, if somebody is struggling to succeed, managing those activities can be a way to get them back on track. But when you’re talking about compensation, the pay should be for results.

An exception to that would be a company – in the start-up phase. There may not be any results to show. We may be finding office spaces. I say we may be getting the website ready to go live. There may not be a penny of revenue.

We may not be projecting any revenue for a year and a half, profitability for five years. You don’t see that as much as you used to but there aren’t results to measure. So oftentimes, early in start-up, activity is really all you have that can be measured.

Pay for performance system and corporate culture
I would also ask the question, can you afford to pay out in a pay for performance system if the results aren’t there? In fact, I was having a conversation this morning when we were talking about how do you define a top sales person versus a poor sales person if you’re not doing it on results?

And it got back to, “Well, you know, they’re the hardest workers. They’re coming in early. They’re leaving late.” And I asked this exact question, “Come in early and going home late doesn’t pay the bills. That shows an effort but can we as a corporation continue to pay people just because they’re coming early and going home late if they don’t have the results?”

There may be cultural issues to deal with but if I’m the CEO of a company, I would much rather have a sales person who comes in late and goes home early, or any employee for that matter, but accomplishes everything we asked them to do and then some as opposed to somebody who’s working very hard but not accomplishing anything.

Again, I’m not going to say that there are not cultural issues associated with that. I’m kind of giving extreme examples for illustrative purposes. At the end of the day, my philosophy is to manage activities and pay for results.

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

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