To Meet Your Objectives, Make Sure the Right Incentives Are in Place

Whether you realize it or not, one thing is true in just about any business. You get what you measure and you pay for. When people's jobs and livelihoods depend on something getting done, it almost always gets done. This means it's important to keep score in order to know precisely how the business is doing in each key area, and to hand out rewards to employees when the goals they're given are met.

A CEO friend of mine explained a move he made to channel everyone's energy into getting what was a failing business turned around. He made sure a percentage of everyone's compensation was based on achieving company goals to do with operating income, cash generation, and revenue. In the arrangement that he and his top managers devised, an individual could end up receiving nothing, or achieve as much as 150% of his or her bonus percentage, depending on the results, and how much of that individual’s income was at risk. Those in positions that stood to have the largest impact on outcomes had the most to gain or to lose. Bonus levels as a percentage of salary ranged from three percent for hourly and some administrative employees to fifty percent of the CEO's compensation. Most executives and the potential to receive above twenty-five percent.

This proved to be a very effective arrangement and it was one move that contributed greatly to a big turnaround financially my friend’s business enjoyed.

A peculiar situation developed at many large companies during the last third of the twentieth century. My friend called it “communistic pay practices.” He says his biggest career disappointment was when he was promoted to manager and received a salary-controlled three percent pay raise. He had to ask himself, “Is this what I work sixty hours a week and travel fifty percent of my time for?”

The truth is, most employees at many big corporations receive the same pay raise each year. If the company-wide increase is going to be three or four percent, you can expect almost everyone to get a raise in that range. You can also expect managers to rate almost all their employees as satisfactory or higher. Let’s face it. These rankings simply aren’t based on the actual performance or the true contribution an employee has made.

Management has itself to blame for this phenomenon. Most people will look for the least painful path. Conducting business this way allows people to avoid conflict. It constitutes the easy way. All they have to do is treat everyone basically the same, keep them satisfied, or at least content and unafraid, and things will run along without disruption and uncomfortable moments. The problem is, executives and managers are not doing their jobs when they work this way. Companies succeed based on the performance of their best people. These people need to be motivated and recognized so that they will deliver their best. They must feel valued for the contribution they make. Don't kid yourself.

The most productive employees know who the unproductive people are, and when it comes to compensation they resent being treated the same. This belittles their achievements and undermines their self-worth. On the other hand, paying for performance and giving recognition of a job well done are two actions that will drive them to achieve even more. In my friend’s case he viewed them important elements in his effort to establish a culture that would create and sustain success, which is why he instituted performance ranking and zero raises.

In an effort to spur all he managers to build more productive teams, he raised the levels at which top performers could be paid. Every year each manager was given a set amount of salary increase dollars and a set number of stock options. Managers then decided, with consensus reviews and rankings, the raises and options that would go to each team member. Although there was no specified percentage goal, fifteen percent of employees typically received no raise at all, and top performers often earned six, eight or even ten percent raises during years when the corporate-wide average raise was three percent. As part of this process, the executives of the company, experienced two years out of six when we received no raise at all.

This put managers in the position of having to explain to employees why they were to receive no raise or stock options when that was the case, and to work with them to help them achieve a higher ranking the next year, or face losing their job or being demoted.

This phenomenon of everyone being satisfactory is, unfortunately, a product of our society today. The attitude has developed that everyone should feel good about themselves. It's an attitude that says all our kids are “above average,” which is, of course, impossible. This may be good for short-term self-esteem. Certainly, we all want to believe we are good and that our children are, too, but this kind of wishful thinking can be harmful in that it separates us from reality and may keep us from expending the effort required to improve and thereby reach our true potential.

When practiced, an attitude of acceptance of less than adequate performance creates trouble on any team or in any organization. Performance must be measured, and the top performers rewarded and motivated. Lesser performers must be identified and worked with. If they cannot or will not improve to an acceptable level, they should be let go. This policy is tough for managers to abide by, but it nonetheless should be part of their job. A clear requirement for performance and excellence must cascade from the shareholders to the Board, to the CEO, and to every level throughout the company. This is what sets excellent companies apart from underachievers and eventually creates long term success.

If you want to learn about a a methodology that creates a structure or framework that will get everybody throughout the organization pulling his or her own weight––everyone from department heads to hourly employees pushing ahead in the right direction with a sense of urgency and accountability, read our book, LEAN ENTERPRISE LEADER: How to Get Things Done without Doing It All Yourself. Click here for a link to the page on Amazon.