Series Part 2: Dangling The Carrot – Performance Based Compensation

Now You Are Almost Ready!

If your test period to define the company as “being under control” was successful the following would’ve happened:

  • The feedback from the employees was positive.
  • The measuring systems worked and you are able to take what you learned and “fine tune” the business plan, performance standards, and pay for performance systems.
  • The process was relatively easy, understandable to each employee, and easy for them to adapt to a Score Card system.

Assuming the test period was successful then you are ready to design the plan and implement it….

It is critical that you conduct a “sanity check” at this stage:

  1. Rewards are given for performing above expectations.  Rewards for performing should come from amounts in excess of what the stockholders should receive as a return on investment, not from dollar one of profit.  Do you know what that threshold should be?
  2. Specifically define the expectations with respect to the “internal customer” within the company and the “external customer”.  If the plan supports the “promise” that you make to your external customer (service, response, time, courtesy, money), if it supports your revenue and profit plan (it must), if it supports concepts of teamwork and centers of excellence (people within various departments that have to work together to fulfill the internal/external customer commitment);, and the expectations don’t break laws or regulations, you can go onto #3.  Remember that incentives should only be based on measurable areas that are important to your business plan that the employees’ activity impacts.  Don’t include costs or activities out of that person’s individual or group control.
  3. Make it easy to measure.  Make the measurements accurate.  Make the Score Cards timely in their delivery to the participating employees.
  4. Make sure the “A” employees see the plan as “fair”.
  5. Make sure the plan easily communicates your business objectives.  Reinforce your stated “Customer Promise”, overall reduce operating costs as a percentage of revenue and potentially attract other “A” employees, either from the “B” pool or from outside the company.  Performance pay that is earned is important.  How you manage (culture of the company) is important.  Have your employees prepared to “sell” your company to other “A” employees.  The more “A’s”, the more the employees will earn, and the more the stockholders will earn relative to your geographic market.

In Part Three in our next issue of the CLM Newsletter we will describe how you Implement the Performance Compensation System after successful testing and any necessary modifications, and know that the system is working.

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