Pay for Performance with Bonuses

by on June 11, 2009 · 0 Comment POSTED IN: HR Info Center

Pay for performance does not work with base salary

When I said, my little thing about pay for performance being the big lie before, I noted that you can pay for performance with bonuses but let’s kind of be real in how this really works. Most people based their bonuses on business objectives, okay.

Pay for Performance Plans
Pay for performance plans are based on things that make some kind of common sense starting with profitability in the organization and then a bunch of business outcomes, most people buy that. They either get their bonus or they don’t. They don’t argue about it. They don’t feel demeaned when you talk to them that way. It works pretty good.

Make sure not to sub-optimize your pay for performance plans
Just be careful in how elaborate you get with your schemes because it’s really easy to sub-optimize. In other words, you can incentivize somebody in the production department for making parts even though the people in the sales department can’t sell them.

You can incentivize somebody who hits sales targets even when it totally undermines the following year or you can get them – I remember a gentleman who told me, he was next door neighbor and I watch him golf, it’s October.

He worked for a company that was going bankrupt and they were writing about in the paper. And this guy was in sales. So, in October, he’s golfing in his front yard and he is practicing.

You know, I looked at him, I said, “Man, what are you doing here in the middle of the day?” And he says, “Well, you know, I already made my numbers for the year.” I said, “Well, yeah. But it isn’t your company really sucking wind.”

And he says, “Yeah.” He says, “But if I go in and I exceed these numbers, I already exceed them by 15%. My bonus cap is out there. And if I make anymore than that, you know, they’re just going to increase my target for next year. How stupid do you think I am?”

And at first, I got angry with him. And then after a while, I’m thinking it’s the idiot who designed the compensation system there that are costing that company money. He sand bag in a bunch of his sale so he can bring him in February, March, they need the sales right now.

Pay for performance should not include development
Don’t include the personal development in somebody’s bonus scheme, okay. Because the reward for being developed is being developed. Okay, in other words, you don’t have to pay somebody extra to make themselves better.

You’re probably paying to make them better. And they will be – it will come back to him. There’s an intrinsic reward in developing yourself. Okay so, I strongly encourage you not to pay people extra for Catalytic Coaching or any other kind of employee-development activity.

Group pay for performance
Pay extra for hitting business objective particularly the big ones that everybody needs to hit because that’s really kind of where the money ought to be spent. If you’re spending above budget or above mark in anything, it ought to be because you’re hitting results as an organization above the market.

I made the statement before and I really think it’s true. Just be careful when you ask for one thing, but pay for something else, guess which one you’ll get? I like bigger measures. So again, when talking about bonuses, I like bigger, broader things. I do like profit sharing, if you’re going to ask. I do like profit sharing.

Now, a profit sharing is usually above and beyond the call of duty though. So, most corporations don’t. And you know profit sharing is one you’re incentivizing everybody in your organization and you’re going all the way to the bottom. Just bear in mind most organizations don’t do that. So, when you’re doing that – if the numbers get big, you’re above the market, . If you’re doing that on top of other things you’re doing for some of your higher level people, again, that’s on top of the market.

So, just be careful, if you’re getting the results that are way above the market and you got your formulas calculated right, great. I love it. Just be careful, you can outwit yourself.

Concrete measures are almost always better. Anything totally subjective here is a problem because you’re going to get into arguments about it. That’s not going to be good for you. Just don’t pay for superior individuality and expect team work. Okay and we talk about profit sharing.

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