It is the time of year when the organization turns it’s thoughts to the annual incentive and how big it will be. A time when compensation plans should be working their hardest to deliver their biggest impact but will this year be any different from prior ones? Will this investment deliver full value or will it again suffer from convenient oversights, retroactive objective setting, inflated accomplishments and behavioural shortcomings that dilute its ability to reward and support culture?
Bonus payouts are the opportunity for compensation to significantly influence future behavior because of how they recognize and reward past performance. More often than not however it’s at this crucial time, that the system breaks down and fails to live its full potential.
Pay for performance is a perfect idea in theory but much tougher to manage effectively. Managers are squarely in the firing line when it comes to getting the most from your incentive plan. Pressure to game results to maintain high payouts, to sure up perceived un-competitiveness or to compensate for influences outside the control of subordinates all factor in the supervisors need to balance misguided engagement and rewarding performance. Without the buy in and support of the leadership team a performance incentive will not reward desired performance.
“Entitlement mentality” used to be a strong component in driving awards and continues to thrive in organizations where payments are viewed as reward for time served even when the objectives of the incentive plan might state otherwise. A true performance culture can only exist when incentives align with objectives and payout on their achievement. Convincing leaders that performance should determine reward and not tenure is key to changing the perception that incentive payments are simply delayed elements of compensation.
Being true to your organizational values, measuring objectives that are important and paying when they are achieved will do more for engagement than fudged payouts. Employees will spot immediately when actions are not aligned with the message or when consistent standards are not applied; lower level employees are not always granted the same flexibility and are expected more often than not to have truly earned their rewards.
The opportunity to change how the plan works for the next incentive cycle is here. The following steps suggest how to generate greater ROI, reinforce a performance driven environment and better support organizational values using your incentive plan:
- Make performance appraisal a focused statement of expected achievement against quantifiable objectives and not an activity list. Pay for results achieved against those goals and not the associated activity
- Let the performance assessment determine the rating, not the other way around. Often, leaders will want to understand how they can fill out the form to achieve a 4 rating. Ensure that the language used corresponds to the performance rating – tell it how it is
- Establish objectives before and not after the performance period has started and support them with numeric targets that cascade from those of the immediate supervisor and ultimately the strategic plan
- Make certain that the process requires written assessments and for them to be completed before any incentive payment is made. Good governance calls for individual payments to the CEO’s direct reports and the total for the rest of the organization, to be approved by the compensation committee or board to ensure appropriate gravitas is associated with the event
- Recognize however, that the incentive is deferred, often delivered long after achievement of the events that led to it. Make sure that it is not used as a substitute for “in the moment” feedback on performance
- Be consistent throughout the organization and apply the same standards of assessment and objective setting from the top to the bottom of your organization. This will reinforce team culture and respect for the instrument as a motivator of behavior
Before the cycle starts take time to educate your leadership team about how to make scarce compensation dollars work for the organization. They lead the application of effective incentives and need to be prepared to resist the challenges outlined above. “On target” performance should result in earning a target incentive that maintains competitive positioning. Time served and effort expended do not and are not prerequisites for receiving incentive payments.