Develop Grow Achieve - 3 Tiers for P4P
Editor's Note: Three cheers for Dan Walter's cogent and Classic advice on how to make pay for performance more successful in your organization.
Pay for performance continues to rise. However, the failure of pay for performance is rising almost as fast. As the discussion about best practices continues, I thought I would provide a few thoughts about an approach that may work for your employees.
Usually the drive for pay for performance comes from the top of the company. “We need to have people be more productive.” “I don't want to have to pay people that much, unless they are REALLY doing a great job.” While these are valid concerns, we must be able to better define what people do that makes a company successful.
1. DEVELOP In the early stages with your company, an employee needs to focus on development. They need to learn who your company is and how it does things. They need to fill the gaps in their professional knowledge with the things that make your company’s approach special and different. They need to build a foundation that can support them as they grow their career and excel at their job. Metrics for development can be tricky when looking for direct alignment to pay.
For these people the goal is to keep things simple. Identify a few key foundational elements that your best employees have told you are essential. Rather than focusing on the results of these elements, focus on people learning or growing these skills, talents or ideas. These are the kind of goals that work well for regular coaching sessions and a loose link to pay.
2. GROW The bulk of your staff should be focused on growth. In broad terms we are usually talking about the growth of the business. In individual terms we should focus on those metrics that drive growth, rather than the end result of growth. Focusing on the drivers allows leaders to continue regular coaching. It is fine to include some aspect of the DEVELOP metrics for those newer to this level. And for those who have the potential to transition to more senior positions, you may consider adding a few ACHIEVE metrics so they can learn how to be accountable for results that may not be directly related to the work they do.
P4P for this group can be challenging, especially if a company is growing quickly. If you focus on the things that drive your company’s success, you can then sprinkle in a metric or two, that is based on a unique time frame, location, project, or other specific, but is perhaps a temporary area of focus. Grow metrics and goals work especially well for short-term-incentive programs and as interim measurements in long-term incentive programs.
3. ACHIEVE This is what your CEO or other “boss-like figure” means by performance-based pay. They only want to pay people incentives if they have proven results. It’s understandable, but not always the best approach. Most companies are successful with ACHIEVE metrics when they are applied to the top tier of the company. When these can obviously be communicated and driven deep into an organization (they may already be part of your company’s cultural approach to management) they can be used at any level. But, let’s face it. Communication of an individual’s impact on these types of metrics requires a long-term and consistent effort. It’s the type of effort that most companies won’t fund, and for which most compensation departments cannot get support.
Effectively linking pay to results requires a fairly tight connection between the actions or decisions of the individual, and the results that are likely to be a combination of many people’s efforts. These metrics include revenue, EBITA, TSR, profit margin, percentage of growth, stock price and similar big-picture measurements. These metrics also have the effect of frustrating someone at the end of almost every measurement period. Your shareholders are upset when overachievement results in big executive payments. Your executives are annoyed when big payouts to managers cut into their ability to spend money elsewhere. Every participant will become upset when success was denied. This is especially true when failure to meet the goal was due to outside market conditions. But in the end these programs, when layered with other good compensation practices, can help a company succeed in a competitive market.
Implementing this approach can take a few years at some companies. At smaller companies, with little prior pay for performance and a strong initiative to create a P4P program, this tiered approach can immediately become the foundation of your program. Of course, there is not a magic formula and I am always excited to hear from readers about how they have approached this issue.
Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He is a “Compensation Futurist” who works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including the only resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, , “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.