If you are the CEO of a business, it is likely you see a gap between the company performance you want and the performance your organization is experiencing. If that is not true, there’s no need to read any further. However, if that is true, it’s probable you are very frustrated. Perhaps you feel as though you are pressing on the gas pedal while those around you have their foot on the brakes. However, as a smart business leader you also recognize that if performance isn’t where you want it, the buck stops with you. So let’s talk about what successful CEOs do to create and sustain a performance culture.
I have observed six methods that most effective CEOs employ to enable a high-performance environment for their businesses.
1. Establish a Performance Framework. An organization’s performance framework has three dimensions: The Business Framework, The Compensation Framework and the Talent Framework. These three parts are separate but interdependent. Within the business framework, a chief executive must articulate the company’s growth expectations (vision), define the business model and strategy, and identify roles and expectations. In constructing the compensation framework, the company leader has to identify a clear pay philosophy, insist on pay strategies that reflect that philosophy and then enable a total rewards approach to the development of a compelling employee value proposition. The final piece in the performance framework is talent. This level of CEO planning has to do with identifying key producers already within the business and then defining where potential talent gaps might exist so a recruiting strategy can be formed. With both existing talent and that being recruited, it includes establishing performance standards as well as the kind of rewards that should be attached to their fulfillment.
2. Define Success. Every role in your organization should have a success criterion attached to it. That criterion must reflect the outcomes for which an individual has stewardship. Those outcomes should drive key results upon which the business model and strategy of the organization depend for success. Defining success, then, improves line of sight. It helps understand the relationship between the vision of the company, how it produces and grows revenue and profits, their role in that process and what’s expected of them in that role. It should also then be tied to a system that provides financial rewards for fulfilling the expectations (success criterion) that are attached to their role (see number five). Defining success in these terms is a natural outgrowth of establishing a performance framework.
3. Enforce Value Creation Standards. Corporate "wealth sharing" (what most people call “incentives”) must be tied to value creation. It requires an organization's leader to be precise about how value creation is defined within that specific enterprise and what thresholds have to be reached before value sharing can occur. For example, one company defined value creation and value sharing this way:
- The first $80 million of net operating profit goes back to the company and shareholders to fuel future growth.
- The next $20 million of net operating profit is shared with employees and is split between short and long-term value-sharing programs.
- After that, all profits are divided 50/50 between company investment and employee rewards (further value-sharing).
Your definition of value creation may be different, but the principle is that rewards (in the form of value-sharing) are not a cost but an investment that is intended to fuel growth. Whether profits are applied to future capital acquisitions or to reward the individuals driving growth, the intent is to improve shareholder value.
4. Recruit “Catalysts.” CEOs that want to drive higher performance will need to attract catalysts—individuals who can dramatically impact the growth trajectory of the business. These are people who can create the right kind of “disruption” within an organization before a competing firm beats the company to it. Catalysts and other strategy leaders need to spend their time on those things that fall within their unique abilities—and transfer to others the tasks requiring scarce skills that don’t impact strategy. This is particularly important since these people will likely be more highly compensated and the company needs them to be at full throttle in their area of highest effect.
5. Define a Compelling Financial Partnership. When businesses are able to make their employees feel like essential partners in the company’s growth plans, they secure greater commitment and focus from those people. Commitment and focus provide the framework that enables engagement and performance to flourish. The pay approach a company adopts frames the financial nature of the partnership it wants to have with its employees. It helps communicate what’s important, what role the employee has in the company’s priorities, what’s expected in that role and how that person will be rewarded if those expectations are met (see number two). If there is not continuity through all the elements of the partnership relationship, the confidence of employees can waver and wane. This is when pay can start adversely affecting performance. This doesn’t necessarily the pay is too low or otherwise “inadequate. This issue is inconsistencies in the partnership. That incongruity breeds distrust—the enemy of engagement.
6. Measure Productivity Profit. A CEO must have a means of evaluating the economic benefit being driven by his or her company’s pay programs. One of those methods is to calculate your organization's productivity profit--the amount of net operating income that is attributable to the contributions of the company's people rather than other capital assets at work in the business. When productivity profit becomes the source for paying out incentives, for example, those rewards become self-financing. They are only paid out of value that has been created. If sufficient productivity profit hasn't been generated, then that reward is not paid out--or it is at least reduced. This ensures that compensation is structured to preserve and enhance shareholder value rather than dilute it. Productivity profit is a key measure of whether or not “performance” is occurring at the level it should be. This approach treats all non-guaranteed compensation as value sharing. This term is important because it eliminates the idea of cost from the pay equation and puts the focus squarely on what it should be. As indicated in number three above, corporate "wealth sharing" must be a function of value creation.
Perhaps at this point you are asking yourself whether all six of these are necessary to drive the performance you want. The answer is yes, all are necessary because they are interdependent. The good news is that all are within your ability to implement. If you will take the time now to approach each of these methods properly you will reap the reward of a performance culture for years to come.