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Ken Gibson
March 12th, 2010 by Ken Gibson

What Does ‘Pay for Performance’ Really Mean?

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.

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Posted in Business Growth & Compensation, Business Growth and Rewards, Current Pay Trends and Topics, Incentive Planning | 1 Comment »

Ken Gibson
January 5th, 2010 by Ken Gibson

Peter Drucker Agrees with VisionLink

Okay, so Peter Drucker never really knew VisionLink.  That’s a detail.  However, his philosophy about pay at the executive and management level was “spot on” with what we believe should be a core tenet of rewards design:

Build world class compensation strategies that are rooted in pay for performance and drive measureable results.

In her November, 2009 HBR article entitled, “What Would Peter Say?” Rosabeth Moss Kanter shares the following insights into Drucker’s thinking regarding the recent executive pay brouhaha.

“Drucker would not have been surprised that incentives to take excessive risks contributed to the recent global financial meltdown.  Back in the mid-1980s, he warned about a public outcry over executive compensation…More than 20 years ago, Drucker pointed to a top-to-bottom ratio that was then rushing past 40 to 1.  Just before his death, the ratio was greater than 400 to 1.

“Drucker was not against wealth accumulation, but he was pragmatic about the work of organizations and society.  He held that the role of executives was to coordinate the actions of others whose motivation (and thus compensation) was necessary to get the job done.  But he also held that pay should be associated with performance; that was a major point of management by objectives, perhaps his most practical management contribution. Listening to Drucker might have headed off some of the excesses associated with Wall Street…in which bonuses not only were decried for their amounts but also were uncorrelated with company results…”

I suspect that most company leaders would find themselves in agreement with much if not all of the issues Drucker raises.  However, although many agree with a performance/pay correlation philosophy in principle, few are translating that belief system into consistent compensation practices.  Fewer still achieve a rewards strategy that could be considered “world-class”; one that places them in the competitive advantage driver’s seat.  A world class pay plan is one that fully integrates compensation into the business plan of the company and creates a seamless link between vision, strategy, roles, expectations and rewards.

What most companies need to bridge the gap between where they are now and where they should (and, hopefully, want to) be is a Missing Structure; a system or process that helps them effectively engineer compensation strategies that impact execution and results.   In our experience, that Missing Structure needs to include the following comp0nents:

  • CEO/Board Level Leadership and Involvement
  • A Clear and Written Pay Philosophy
  • A Comprehensive Compensation Gameplan
  • Fully Integrated and Correlated Pay Strategies and Plans
  • Consistently Executed “Line of Sight” Review

These steps ensure a cohesive, consistent approach to talent attraction, retention and development.  Likewise, they provide checks and balances that protect the company from sacrificing good profits for bad or that substitute short- term performance bursts for sustained results.  When properly executed, these measures make sure that all incentive plans are self financed and pay benefits that are correlated with increased shareholder value, and other critical measures.

Many of the companies that have made headlines in recent years lost sight of these important principles as it relates to compensation development and management.  Again, Peter Drucker’s observation is a correct one.  He stressed that:

“…ensuring the long-term health of the company–and eschewing short hits that jeopardize the future–is executives’ primary job.”

We are happy to know that Peter Drucker agrees with us.

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Posted in Business Growth & Compensation, Business Growth and Rewards, Current Pay Trends and Topics, Incentive Planning | No Comments »

Ken Gibson
June 16th, 2009 by Ken Gibson

Avoid the Temptation of Bad Profits

Difficult economic cycles can lead individuals and organizations to practices which, in better times, were unacceptable.  Most of the time, this isn’t the result of some overt change in the corporate value or mission statement.  Rather, it comes more often in the form of revised expectations that can only be achieved if something is given up.  Too often in such cases, what is surrendered are good profits. 

In his book The Ultimate Question, author Fred Reichheld (director emeritus and fellow at Bain and Company) explains it this way:

“Too many companies these days [especially during recessionary periods] can’t tell the difference between good profits and bad.  As a result, they are hooked on bad profits.

“…Whenever a customer feels mislead, mistreated, ignored, or coerced, then profits from that customer are bad.  Bad profits come from unfair or misleading pricing.  Bad profits arise when companies save money by delivering a lousy customer experience. Bad profits are about extracting value from customers, not creating value…

“Good profits are dramatically different.  If bad profits are earned at the expense of customers, good profits are earned with customers’ enthusiastic cooperation.  A company earns good profits when it so delights its customers that they are willing to come back for more–and not only that, they tell their friends and colleagues to do business with the company.”  (The Ultimate Question, Fred Reichheld, Harvard Business School Press, Boston Mass., 2006, chapter 1)

How can effectively engineered rewards strategies help an organization avoid bad profits?

It starts with a philosophy statement that defines what kind of performance the company will reward.  Such a philosophy should lead the business to develop both short-term and long-term incentive plans that mirror the immediate AND  sustained results the organization seeks to achieve.  Metrics for both plans reflect the performance standards required for a sustained increase in shareholder value.  Short-term rewards create a sense of urgency now while long-term incentives keep the performance “honest”–so key talent stays focused on consistent, prolonged  execution that moves the  customer from awareness to acceptance to advocacy. 

This approach also allows the company to “flex” with the economic cycle it’s experiencing.  When the economy is soft, employees are told that annual incentives will likely be minimal if paid at all.  However, performers can be assured of increased value credits to their long-term incentives (typically not payable for three to five years or longer) if they perform in a superior fashion.  Ultimately, determining which incentive plan should be used (ones that increase shareholder value through sustained good profits) is a key CEO decision that will deeply impact the ability of the company to avoid the bad profit syndrome.

Using compensation as a strategic tool, then, becomes a critical way organizations reinforce vision, strategy, roles and expectations to their workforce.  Taking time to address these issues properly is key to generating good profits instead of bad.

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Posted in Recession Strategies | No Comments »

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