Series Part 1: Dangling The Carrot-Performance Based Compensation

Believing “if only I had an exceptional performance compensation system then employee productivity and accountability will follow”, is as wrong as the company that pays “Christmas Bonuses” and doesn’t understand that it’s no more than an entitlement.  Within this three-part series, we will outline methods of creating a performance pay or incentive plan that works.  However, in order to make it work there are some basic issues, processes, and clear understandings about your company that must be addressed.

How to Prepare for Performance Pay Systems:

  1. Create a plan of revenue and profit that is both achievable to revenue and profit goals for the 12-month period for which the Performance Pay System is intended to commence. This plan should define:
    1. What are the critical processes to be accomplished;
    2. What specifically is expected of the critical people around those processes;
    3. What methods of measurement are available to your company and;
    4. Create a monthly financial forecast of that plan and results of the processes noted.
  2. Test the concepts of the plan for 3 months. Explain what is trying to be accomplished (specifics of number 1 above) to your key or critical people.  Let them know this is a test period prior to implementing a performance incentive program.  “Spiff” them if they achieve the objectives for this 3-month period.  This will let you know that your company is under control.  A company “out of control” will never succeed with a performance compensation system.
  3. Measure during the 3-month period what you have defined as critical to the success of the plan. Measurements should be timely (daily, weekly, monthly as required), they should be accurate, and they should be responded to by the critical people that receive these measurements.  Response means to understand what they did right if it’s working (so they repeat it), or correct what is not working immediately to a stated timeline of correction and to the result intended.
  4. Evaluate all your key staff. Do this by rating them, in your judgment, as either:
    1. An “A” player, someone who fits perfectly;
    2. A “B” player, someone who is almost there or;
    3. Any employee below.

Imagine starting the company over again, only this time with all the knowledge and customers you already have.  What would be the optimum organizational structure, staffing, and correct pay rates?  Your future intent needs to be to staff with all “A” employees at critical process and management positions within 2 years.  Having “B” employees moving rapidly to “A” levels are fine. “A” levels moving quickly to “B” are not.  Anyone who is not close to either “A” or “B” should be forgotten.  If you want more information on how to properly evaluate your employees, there is a series of books “Top Grading” by Bradford D. Smart, PhD. that I recommend.

  1. Consider how long you would like to absolutely keep a key manager or employee. Considerations of age, replaceable skills, importance to the revenue and profit plan, and their ability to enhance your business team are all important to this precursor for “golden handcuffs”.  Part of the performance pay earned will be deferred to fund this important aspect of your pay plan and company success. As a side note, you can also determine in the interviews what is important in the next three years to the key or critical employee (money, security, etc.).  Often a “non-qualified” plan of paying for long-term disability insurance or key person life insurance can be another method of avoiding additional payroll taxes, pension, profit sharing costs, and workman’s compensation costs on some of the currently paid incentives earned.

In Part Two of this series, we will describe how you prepare and test your performance compensation system before implementing it.

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