Jun 15, 2016
It has been said that Vince Lombardi was once asked by a reporter to explain the game of football. The legendary football coach thought a bit and replied, “You know that could be a long answer. Football is a very complicated game.” The reporter then decided to rephrase his question, “Mr. Lombardi, could you explain the essence of the game of football?” Mr. Lombardi quickly responded, “That is a much simpler question. The essence of the game is running, passing, tackling and blocking. If we can do these things better than our competition, we are going to be winning more than we’re losing.”
Education on the Essence of Business
To follow the lead of Mr. Lombardi, a company needs to determine the “essence of their game” and reinforce it in everything they do. More and more companies are realizing this opportunity and incorporating metrics and goals into their training, communications, performance management, and pay.
Various studies have shown that companies do a poor job of linking employee performance, goals and compensation
to company strategies and objectives. In fact, most indicate that up to 70% of employees believe there is little or no connection between their performance and pay. This is certainly a statistic that managers and owners should be concerned about, and one which can certainly be changed. Company mission or vision statements often include such declarations as; “we will be a company that respects people and encourages teamwork.” Yet, rarely are goals shown, measures reported or pay aligned to support the statement. Therefore, employees see little substance behind these statements because there is no reward or consequence within the compensation system.
Incentive Compensation Best Practices
One of the most powerful tools at your disposal is that of incentive compensation. There is a saying, “What gets measured gets done.” Newport Group suggests a second part, “What gets rewarded, gets improved.” With that in mind, there are some best practices which are critical to making “pay for performance” a big success. Some best practices include:
Tying Pay to a Scorecard
- Determining the key performance metrics and sticking to those factors as long as they continue to represent success for your organization. That said; limit the number of metrics to no more than five in order to focus employee efforts on those things that are most critical.
- Making a plan lucrative enough to be worth pursuing.
- Keeping it simple. Do not focus on putting extensive caveats into the program. These types of measures often leave employees sensing unwillingness to really pay.
- Having a formula that is win-win. If the targets are set correctly the company can be generous yet prudent at the same time.
Companies need to determine their key strategies and tie an employee’s wage very directly and substantially to the achievement of these goals. Employees will quickly see that their increases will not only be based upon productivity or tenure, but potentially business development, customer service, innovation or process improvement, for instance.
Although many areas could apply, four areas that should definitely be considered include: financial performance, internal business process, customer satisfaction and employee satisfaction. One of the benefits of a balanced approach is it encompasses all areas of importance to the company and diminishes the common obsession with financial measures of performance. That is not to say that financial measures are not critical gauges of success but they need to be tempered with indicators of customer satisfaction, innovation and process improvement. Although these metrics will not always be as direct or tangible as ROA (return on assets) or ROI (return on investment), they are extremely good predictors of future financial performance.
Making the Connection
A Midwest foundry has developed their scorecard objectives into an incentive compensation system that very directly rewards employees for performance against a blended set of performance metrics. In this company, employees can earn anywhere from 7% to 35% in incentive pay depending upon their role in the organization. Performance results in each of the four areas are conveyed very clearly along with the incentive opportunity associated with levels of improvement. Payout occurs quarterly which keeps employees’ attention focused on monthly results.
Just as Vince Lombardi experienced with football, business is very complicated too. The essence of your business can be summed up through a balanced scorecard into the four key perspectives: financial, internal business process, customer and employee. By getting everyone focused and rewarded on executing the “essence of the company,” a company’s performance, profitability and employee retention is positioned to be a winner.