Building Unified Financial Visions

Certain words and phrases become part of a kind of  business “pop lexicon” as they are used and repeated incessantly over an extended period of time.  When they do, their meaning often becomes diluted.  As that happens, businesses sometimes assume “it must have been a passing fad”–so think they can now ignore the issue.

We fear “Pay for Performance” is in danger of becoming just such a phrase.  So many use it, but so few can tell you what it actually means.  Fewer still employ this philosophy, even when they outwardly espouse it.

We believe any company that wants to achieve World Class Performance must have World Class Compensation. As a result, it must understand and embrace a pay for performance philosophy and plan. Because we believe that, we’d like to tell you what we think it means.

A company is employing a pay for performance strategy if its rewards programs are structured as follows:

1. The company ties awards to shareholder financial objectives. In a true pay for performance environment, incentives drive value for shareholders and the company is able measure the impact their rewards strategies are having in this regard.
2. The business employs the right “mix” of compensation elements. Organizations that tie compensation to performance standards understand that how they pay people has a bigger impact on results than how much they pay them–although both are important.  Pay for performance means the company strikes the right balance between guaranteed and at risk compensation, and short-term versus long-term incentives.
3. Payouts result in meaningful dollars. Employees want to feel a sense of partnership with owners in achieving company goals.  This creates a unified financial vision for growing the business.  Such a unity can only happen when value sharing reaches a threshold that is “meaningful” to employees. In organizations that achieve this, employees are thinking (and hopefully saying) the following: “It’s important to me that the company achieve its goals because what I receive if it does is meaningful to me.”
4. Performance expectations are tied to factors  employees can impact. It doesn’t matter how much employees have the potential to earn if they don’t feel they can impact the outcome that triggers their award.  In too many cases, what is supposed to be an incentive turns into a credibility problem for the company.  “Sure, you tell me this is my award, but I’m not really in a position to earn it.”
5. Rewards are consistently communicated, reinforced and celebrated. This is a primary way a partnership mindset is nurtured.  Individual, departmental and company wide achievements are celebrated and employees sense they are participating in something great they helped create.  Sustained success and a culture of confidence grow out of such an approach. 

These guidelines will never go out of style, regardless of the popular lexicon that is in vogue at a given moment in time.