There seems to be increased interest in performance-based compensation programs, a result of the difficulty many business owners face in attracting and retaining employees.
The right performance-driven compensation program can be a powerful tool for achieving both objectives. As with anything affecting employees’ earnings or their sense of security, a program needs to be well thought out and carefully designed.
Many academic explanations and justifications have been written in support of performance-based systems. However, the reason for implementing a program simple: To motivate employees to think and act like owners.
These programs should be designed to give employees a feeling of ownership by rewarding them for behavior and performance that is directed toward achieving the vision and goals of the company. The program can, by defining the requirements for bonuses and added compensation, clearly communicate to employees what is important to the success of the company.
One size doesn’t fit all
As with most management tools, performance-based compensation must be customized to fit the company, the type of work performed, the level and skill of employees, the overall culture of the organization and the ultimate objectives of the program. If you are considering an incentive program, the first step is to clearly define the objectives of implementing the system.
Is it intended to reward employees for specific job-related performance or reward them for overall company performance on a monthly or annual basis? Is it intended to reward individual performance or build teamwork by rewarding overall team performance?
Next, determine what type of program to pursue. Is the organization ready to convert its overall compensation program to a performance-based one or would it be better to move slower by trying smaller, more specific incentives as add-ons to your existing system?
Implementing a total performance-based compensation program will require more initial effort to ensure the system achieves the objectives. It also requires much more effort directed at the organizational and employee issues associated with changing a compensation structure.
A less extensive specific reward program can be implemented more quickly with less risk.
Success stories
One of our clients took a pioneering leap into a companywide performance bonus program nearly 10 years ago. The company was young and had few employees, but management wanted to reinforce its desired company culture and provide a tool to retain key employees.
Today, with a company that is four times larger than it was 10 years ago, the system is still based on annual payouts for every employee in the company. Over the years, it has been adjusted to fit the company’s growth and to enhance it by utilizing improved information systems.
The annual bonus is now based on achieving three key performance indicators in addition to the original profitability targets.
What hasn’t changed is the employees’ excitement and enthusiasm for the end-of-year bonus and their commitment to the company’s vision, goals and the bottom line. They have ownership.
Factors to consider
A performance based compensation system can make your employees behave more like owners and stop asking themselves questions like, “Why should I work harder? What’s in it for me?”
But, it must be done right to achieve your objectives and avoid major turmoil. It will require considerable time and thought but will be worth the investment. Here are two important factors to consider before starting the design of your system:
- A performance-based system cannot be a solution in itself. It should only be a part of the overall culture of the organization.
- Performance goals must be realistic and the employees must be able to directly affect their outcome.
With that in mind, you’re well on your way to determining what’s best for your organization. Joel Strom ([email protected]) is director of Joel Strom Associates LLC, the Growth Management practice of C&P Advisors LLC. The firm works exclusively with closely held businesses and their ownership, helping them set and achieve their growth objectives while maximizing their profitability and value. He can be reached at (216) 831-2663.
