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The Slippery Slope of Pay for Performance Programs
By John R. Hendrie, October 2006

Naturally, we want to incent our Managers, push for results, and drive for the numbers.  The Bottom Line, ultimately, is how we evaluate Performance, what pleases our stockholders, and, theoretically, encourages our stakeholders.  And, with a solid reward program, Pay for Performance, in place, “It is a slam dunk”.  Whoa, time out! Let’s think on this. That phrase has taken on new meaning. 

It does not take a fancy-pants Philadelphia Consultant to design a Performance Plan for your Managers and/or Executives.  The concept is very straight forward.  You simply benchmark objectives, set a performance bar and create a reward scheme, usually a percentage of one’s base salary. As almost all objectives can be quantified, those goals (meet, increase, reduce, exceed by a %, a $ amount or a date) are explicit, clear and concise.  Simple and straight forward at the onset.   However, the means can get in the way, just as the ends can become illusive.  Therefore, the Plan you have deftly crafted to incent performance, meet organizational strategies and push profits can become dysfunctional, cumbersome and, actually, a de-motivator for your Management Team.  It becomes a blur!

The best Performance Plan is kept simple, and it is usually composed of two sides of the ledger:  Company Revenue and Participant Objectives. The Company needs to meet or exceed its numbers, just as the Management participant must meet their Objectives.  These Objectives can be hard, like increase Sales by 20% or soft, like reduce Customer Complaints by 10%.  The Company’s Strategic Plan Objectives are disbursed, distributed through the Management ranks, thereby also becoming shared objectives for the participants.  Theoretically, if the majority of these goals are met, the Company prospers and everyone benefits.  Looks like a Plan; sign me up! 

Experts far more sophisticated than I will demonstrate that this compensation “onion” can be sliced many ways and in many angles and layers, but the above is the typical framework.  I am of the school the more complex, the more distant; I want immediacy and simplicity – something I can touch.

On paper, this sounds reasonable and easy to administer.  But, hold the phone.  Firstly, Management Goals and Objectives must be approved by Senior Management, the initial stage of your negotiation, if you can catch them and sit them down to mutually target and agree upon objectives.  The next barrier is the measurement of our progress, typically tracked by the Budget.  

How in heavens name can you place any credibility on a 12 month budget, much less a Five and Ten Year Plan, I might add.  There are far too many assumptions which whack the numbers and the projections.  Also, managers understand the directive to stretch themselves and their resources, but in this age of doing more with less, we shoot ourselves in the foot rather than shod ourselves with the finest Italian shoes. And, now, we really need to hold the negotiations on a monthly basis, in order to retain or regain the light, rather than further the blur.  

On the other side of the Ledger, particularly privately held companies can practice very creative accounting, as they “chase the rockets”, those sure-fire, often secretive ideas with the expense (and the loss) then buried in the P&L.  Publicly traded companies have also not fared too well in the past several years with sometimes blatant malfeasance. Finance people, please do not take offense, it is just about the “buckets”, but I do not control them, name them or assign expense to them.   No matter (right!), our Budget is typically a major determinant, so start your documentation now. 

The landscape does shift, priorities change, the market is variable, so a Quarterly Review is suggested, at minimum. This is where the worthwhile discussions (battles) should take place.  It is timely, and plan accountability is critical.  Objectives can be adjusted or modified accordingly, if you can snag your Executives, who are very much in action – hard to hit that moving target.

Year End is the Final Report.  Gather your data, compile your documentation, compare actual to plan objectives, and submit the results.  Hopefully, your side of the Performance Plan Ledger is favorable.  Now, we await the manipulation of the final figures for the P&L, and wait, and wait.  And, of course, you now are in the next year of the new Plan, laying out what you expect to accomplish in the upcoming year.  The cycle continues.

There is no perfect reward plan out there.  Personally, I cannot think of one company which has had the same plan in place for the distance.  The Consultants come in and recreate and redecorate the modules and methods.  It usually boils down to the same gift, just packaged differently.

Does such a Pay for Performance Plan for Management make sense? Absolutely!  Share the strategic goals, regale in the progress and share the bounty!  What happens is that variables and inattention can scuttle your best intentions.  Some parameters to keep in mind:

  • Keep the Formula simple.
  • Objectives must be in the control of the participant.
  • The Financial Reporting System must have some credibility.
  • This is not an HR project.  They can administer the Program, but Senior Management must be the driver.
  • Scheduled Progress Reviews are essential.
  • Remuneration must be made in a timely fashion.
Make me a believer.  Forget a Blackberry, when a Timex will do; I just need the time, not logarithms. Yes, I want the Company to succeed, I want to be part of that, and I want my contribution noted and rewarded.  A successful program need not be sorcery.  It has a place in the very fabric of our motivation to achieve.  Incent me, please.
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Contact:

John Hendrie
Hospitality Performance
www.hospitalityperformance.com

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Also See: Successful Bonus Programs Conceived by Linking Incentives with Performance/ HVS / Kefgen / July 1996
The Mobile Executive in a Global Economy - New Approaches to Compensating Executives / Arthur Andersen / Winter 1996


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