Silence
My blog on performance management got a lot of positive energy and comments. My last blog was met with a thud of silence.
When I reached out, not everyone liked what I was proposing for compensation. Open systems are scary. Agreeing on salaries could take forever particularly with “some” people. I am not going to defend my suggestions because, truth be known, I’m not sure I’ve nailed it yet. But I will re-enforce a few things that I don’t think should be lost in the debate.
Remember my first blog? Performance management really doesn’t work very well. Everyone (almost) agreed with that. There was a feeling of “finally, someone said this” to your comments. Well, since performance management doesn’t work very well, we can’t link it tightly to other things. We should not link it to salaries.
What should we link salaries to? Salaries should be linked to the market and possibly (gulp!) seniority (since it is a pretty good, albeit imperfect, proxy for experience). Oh the comments I will get on that! Yes, you will have to be very good at hiring and coaching to make that work.
Finally some closing comments on salary systems. Salary systems:
- Are never perfect. We should acknowledge and honour that. We must stop assuming it is based on some irrefutable data or process.
- Should never be built to manage “some people”. Building systems in that way usually de-motivates your star performers.
- Should be the intersection between what the person thinks they are worth and what the organization thinks they are worth. That often needs to be negotiated. “Worth” is defined in both the internal market (in the organization) and the external market for most jobs.
I am feeling courageous so I’ll now weigh into the area of variable compensation (or bonuses). I think this is where you get to “play”. The first thing every organization should consider is profit sharing.
Profit sharing works. There have been lots of studies that have proven this. It is a very effective tool to drive loyalty and connectedness to an organization. Employees who get profit sharing will feel more loyal and try harder to be contributing members to your organization. This is particularly important if large numbers of your employees touch the customer. Ever fly Westjet? Did you notice how nice everyone is? “Westjetters (Westjet employees) are owners.” It is in their best interest to do things to preserve and build profit in the organization. They do this by building customer loyalty through all of their interactions with the customer. More profits = more profit sharing. It is a formula for growth.
I think profit sharing is underutilized in favour of organization wide bonuses. Which you’ll see can be less effective.
Bonuses should absolutely be tailored to your organization or group. You should think of bonuses as your rifle not your shotgun. Bonuses should be bases upon two things.
- First, what the organization wants to reward in that particular group of employees (sales growth, customer loyalty, zero defects).
- Second, what the employee or group of employees can actually control.
Organization wide bonus systems rarely work well. Organization wide goals usually do not meet the second criteria above. Very few employees can do much to impact the organization’s strategic objectives in large organizations. Consequently, organization wide bonus systems function more like a very expensive “Christmas turkey” than a true driver of behaviours. Profit sharing is better for driving organizational commitment and loyalty.
Bonuses should be different for different groups within an organization. Sales people should get bonuses based upon their sales results. Plant managers should get bonuses based upon quality and efficiency measures. Some groups should get profit sharing only and no bonuses (when their outputs are not easily measured). In many cases (or most cases), bonuses should go to the whole team and not to individuals. Organizations are complex. There are few instances today where someone meets a goal completely on their own steam.
Sound complex? It is. Wouldn’t it be easier to have an organization wide bonus system that covers all the bases? It is, but you very well might be wasting your money.
Sandra Oliver - November 20, 2008
Filed under:
executive coaching,
motivation,
business strategy,
workplace,
goals,
strategy execution
Sandra Oliver
Sandra Oliver Sandra Oliver is a leadership coach and consultant with more than 17 years experience in Corporate HR leadership roles. Her expertise includes change management and succession planning. Sandra is the founder of IMPACT Consulting Inc.
Comments (8)
1
Profit sharing systems work well in organizations where there are many similar jobs, for example in manufacturing or assembly line work. There is ease in measuring results and arguably, each person has contributed a similar effort to achieve the results.
In the knowledge environment, the norm has been to reward contributors through a bonus system based on the value of their individual contribution, with Thought Leaders and Sales folks receiving the lion’s share of variable pay. In an effort to recognize that more than one individual contributes to any idea or sale, organizations typically have three measures that make up the overall bonus, ie: company results, region/division/dept results, and individual results. In my experience, these systems are easily manipulated with a lot of effort going into calculating and negotiating ‘credits’. In other words employees lobby other employees to include them on the list of contributors. In addition, many employees believe that the organizational goals are set beyond achievement, thereby making their efforts for naught. Most organizations struggle with this dilemma, particularly since many employees work on various teams which only makes the awarding of variable pay more difficult.
So, how do you design variable pay that works? Profit sharing has the greatest alignment with results and each individual knows what they have to do to achieve results in their role. However pure profit sharing awards the same dollar amount to each employee, which doesn’t motivate greater individual effort. So, perhaps the answer is a combination design: A percentage of overall company profit (not achievement of company plan) makes up the ‘bonus pool’ which is allocated to each individual based on two measures; team (however the company defines that) and indivudal. This doesn’t eliminate the complexity, in fact it’s probably more complex and requires good goal setting and performance coaching. However it does marry the best of both worlds.
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