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Paying employees for performance, however defined, is a key objective for most organizations. Research overwhelmingly supports the theory that linking pay to performance has a positive impact on the motivation to perform. One of the requirements for rewarding pay appropriately is defining performance appropriately. People must believe they can meet their performance standards and objectives if they are to be motivated to extend their best efforts. They must also believe they are being measured on things they can impact, if not completely control.
When consulting with a broadcasting corporation, I was charged with interviewing TV and radio station managers to determine if their direct compensation package was competitive and appropriate. Base pay ranges were evaluated and found to be competitive. Station return on investment was the metric used to determine annual cash incentives and the performance standards were found to be reasonably competitive. But station managers believed the ROI measure to be flawed.
One TV station manager complained that an expensive fluorescent sign had been installed on top of the station, which was located on a ridge overlooking the city. Corporate management viewed the sign as a marketing tool, while the manager viewed it as being of no value in producing station results, and saw it as an example of corporate vanity.
After a lengthy negotiation, the metric used to drive the annual incentive plan was changed to eliminate expenditures that reduced profit and over which the manager could not control. A similar complaint was lodged by another TV station manager that corporate had established a mandate they had to be first on the scene, capable of providing the complete story in their news coverage with both video and audio. This required the purchase of vans equipped with expensive technology. The manager believed the station derived an inadequate benefit from the vans to warrant the purchase and maintenance costs. The cost was removed from the formula for determining incentive awards after negotiation.
Finally, a radio station complained that, due to geography, the station was signal limited and was incapable of meeting the performance standards that were established for other stations. All of these occurrences illustrate that when managers are expected to produce a return on an investment, they must be able to decide on whether they should make it if they were to believe they are fairly measured and rewarded.
Establishing Fair Performance Standards
Even if the performance metrics used to define performance are appropriate, fair performance standards are often difficult to establish. “Piece-rate” incentive plans measure output against established standards. In my first job out of undergraduate school, our group in an executive development program was asked to suggest a performance standard for folding corrugated boxes that were used to ship high value product.
Though on the surface that task seemed routine, we found that the complicated process made it difficult to do it properly at high speed. We were then asked to observe someone performing the task and to set a production standard. This was a setup, because that one individual consistently produced output that was more than 30% higher than the average others were capable of. The lesson was that, if the performance data on that person was used, it would result in an unrealistic standard.
A final example of a flawed standard was the use of a customer satisfaction metric to evaluate customer service agents at a retailer. Agents deciding on whether to issue a credit for a merchandise return can only control their behavior, since some customers will not be satisfied no matter what the outcome of the transaction. If the agent gathers all relevant information, correctly applies company policy and treats the customer respectfully, that person has performed well on everything they can control.
The basis for gathering performance data must also be appropriate. Hotel chains that evaluate individual properties on customer comment cards must consider who is likely to voluntarily take the time to complete them. If all was “OK,” it is unlikely the card will be completed. If service was “outstanding,” there is a slim chance that the guest will take the initiative to report that. And since a high percentage of the cards will contain negative feedback, the expectations of management must reflect that. The cards can still be useful for identifying problems, but are of little value in evaluating overall customer service.
“What you measure and reward you most surely well get more of” is a principle that management must incorporate into the process of establishing performance expectations. Banks almost brought down the financial system by providing rich incentives for selling products that turned out to be disastrous. Employees cannot be blamed for doing what they are asked to do and rewarded for. Rarely are they allowed to provide input into designing incentive plans, which leaves the door open to major mistakes in designing programs.
Different functions make different types of contributions to organizational performance. Yet focusing on one factor when measuring each may lead to them working at cross purposes.
R&D functions are expected to produce the best products possible. But a singular focus can result in misdirection. Bang & Olufsen designed electronic products that were both beautiful and of the highest quality. But they were so expensive that they did not do well commercially.
Yet if finance focused solely on costs when providing R&D budgets, the products might fail to sell well even though they are reasonable in price, because of poor quality. And R&D might design something that manufacturing cannot build. It is therefore critical that the criteria used to measure and reward performance for each function elicits the right focus from each and contributes to overall performance.
One of the most important characteristics of a pay-for-performance program is that it defines and measures performance appropriately. Financial rewards are a powerful motivator. For that reason, how performance is defined and rewarded must motivate people to produce the results the organization needs to succeed.
About the Author
Robert J. Greene is the CEO of Reward Systems Inc.