BeyeNETWORK - The Global Vision for BI and Beyond

Pay for Performance: A Long Way Off

Published: October 17, 2007

Pay for performance has the potential to be one of the biggest paybacks of a business performance management initiative.

The primary goal of business performance management (BPM) is to improve a company’s performance and, therefore, its bottom line. Business performance management helps companies move down this path through the development of dashboards populated with key performance indicators (KPIs) tied back to corporate strategy, planning and budgeting capabilities that define performance targets and goals, and consolidation and reporting modules that facilitate analysis of actual performance against plan. While all of these capabilities provide their own benefits and usually reduce labor costs, they won’t necessarily improve a company’s performance on their own. This requires the participation of people, performing optimally in areas strategically important to the company. That’s where the rubber meets the road and many performance initiatives stall out.

Business performance management can help bring a company’s employees into strategic alignment. That is, through a focus on KPIs, everyone can easily see what is most important to the company and the performance targets for those areas. If a series of cascading dashboards is developed, taking the corporate KPIs down to a departmental and individual level, that is even better. This approach provides more relevance and ownership by bringing the company’s goals down to a level where individuals can see how they can make an impact. There is a gap, however, between understanding and acting. Business performance management can help everyone understand what they should be doing; however, getting them to take action is the challenge. That’s where paying for performance comes into play. Programs of this type are essential to help BPM deliver on its promise of improving company performance. Tying pay to achievement of key performance measures can have a huge impact in helping create a performance culture. Unfortunately, in most companies (outside of a few departments such as sales), this will not be happening anytime soon.

I have come to this conclusion after watching the issues unfold as one particular organization attempted to implement incentive pay tied to performance for its employees. On paper, everything looked right. The employees were a well educated group who should understand the benefits – to themselves and the organization – of such an approach. As a matter of fact, their daily job is all about helping improve the performance of others. This group of employees was also not as well compensated as they should be, and incentive pay was seen as a way to increase the money earned by the best performers. A common challenge for these programs often comes down to how performance will be measured. In particular, is the data reliable and consistent? In this particular case, there were already agreed-upon and objective state-wide standardized measures in place for other purposes that could be used for this program. In case you haven’t figured it out yet, this group of employees was a town’s teachers, challenging the board of education’s plan to implement pay for performance.

Their issues were many, and probably similar to what most companies will face as they go down this path. For one, they felt this approach would destroy teamwork and create a competitive every-man-for-himself mentality. What it actually does is get everyone pulling in the same direction and rewards those who meet targets, irrespective of what anyone else does or doesn’t achieve.

Another concern is basically about upsetting the status quo. Currently, teachers are paid based on seniority and academic credentials. They know that over time they will earn more and will be rewarded for their investment in their own education. That’s great, but you can end up having a very senior, well educated employee who doesn’t achieve the results of their younger counterparts. In most pay-for-performance arrangements, the base salary is not affected. So, people can still earn their salary as determined by years of experience and other factors. This is a way to offer pay on top of that to those who are truly delivering for the organization. It also helps a company to retain its best employees since they should feel well compensated.

One final comment the teachers made is an interesting one. They didn’t want to be party to a “salesman-of-the-month” approach to compensation. There will be thoughtful, intelligent people in every organization that view incentive compensation in this manner. For this reason, the program needs to be developed and rolled out in a way that is consistent with the company’s culture and that of the particular department.

Obviously, change is difficult and can be an emotional issue for many. That is why it is critical to have the following in place before moving forward with pay for performance:

• Someone senior to spearhead the effort, manage through the challenges, modify the plans as needed
  
  
• A consistent and reliable set of data (BPM’s one version of the truth)
  
  
• An agreed-upon set of key performance indicators that everyone buys into, or at least understands
  
  
• Targets that are reasonable and employees feel are achievable
  
  
• Education around what is expected of each individual and how it will be measured and rewarded
  
  
• Change management to smooth the transition to this new culture of performance

The process of getting to pay for performance can be lengthy and painful. The results, however, are well worth it. If you bypass this particular aspect of business performance management, you are missing out on one of the biggest potential paybacks of your business performance management initiative.

If you found this article helpful and would like to receive the latest insights each month from Craig Schiff and other experts featured on the BeyeNETWORK, please subscribe to the Business Performance Management Newsletter.