Follow these nine steps to find pay for performance success.
At this point, most company executives agree that pay-for-performance plans are an effective tool not only to align the employee’s behavior with the company’s goals, but also to attract and retain the best talent. The question is, if they are so great, why doesn’t everyone have an element of incentive payment plans as part of the package they offer to employees? The short answer is that as with any powerful tool pay-for-performance plans have a learning curve, they require regular maintenance, and if they are misapplied it can do more harm than good. So whether you are implementing a pay-for-performance plan for the first time, or trying to improve the effectiveness of an existing plan, consider these nine critical steps for a successful pay for performance plan:
1) Understand the company’s overall business strategy. You must gain a deep understanding of the strategic context that the plan is intended to support. Review the company’s mission, business goals and objectives, the HR strategy, and the compensation philosophy. They are the foundation of the company’s management framework that the incentive compensation plan will need to align with and reinforce.
2) Identify root causes of poor performance. What is driving the need for improved performance, teamwork, or employee engagement? Challenge whether you only have a pay problem, or are there other factors that need to be addressed?
3) Identify the company’s key strategic objectives. Specifically, what do you want to improve: customer satisfaction, productivity, quality, new products or process improvement? Assign different weights to these objectives based on impact, importance, and your degree of confidence in your ability to measure results.
4) Create an integrated set of financial and strategic objectives. The goals must reflect a balance of financial results and the key business drivers. Set a range of financial and strategic performance levels and commensurate reward levels. Provide payout opportunities that are consistent with the value of the performance and meaningful to employees.
5) Define clear objectives for employees. Participants must have a clear line of sight to the goal. They must understand the actionable measures that they can impact that determine revenues, costs, productivity, or profits.
6) Communicate the objectives. Notify employees of expectations early in your goal-setting process. Allow time for managers and employees to align business unit, team, and individual objectives with company objectives.
7) Prepare to remain engaged. Expect this to be an ongoing and iterative process. Refresh your plan each year based on business conditions and updated goals and objectives. If this is your first pay-for-performance plan, start out by piloting a plan in a segment of your business.
8) Communicate with employees on all aspects of performance. Use the pay-for-performance plan as one component of your ongoing communications with employees. Provide ongoing feedback to all participants. Use progress updates, recognition for both small and large wins, and other reinforcements for results achieved.
9) Finally, remember the plan is not an end unto itself. A pay-for-performance plan is just one part of a company’s management framework. The more these programs and systems are synchronized and integrated, the greater the likelihood that the company’s overall vision and business goals will be achieved. Consequently the more closely aligned a pay-for-performance plan is with the management framework, the more successful it can be in providing strategic support for achieving your company’s synchronized goals and objectives.
So, whether you are implementing a pay-for-performance plan for the first time, or trying to improve the effectiveness of an existing plan, read more about how to properly design and execute a compensation system in my article written for the Maryland Association of Certified Public Accountants monthly publication, Statement.