As companies begin work on incentive plans (whether executive plans, management, or sales plans) for the upcoming year, there are 3 critical mistakes companies often make in their zeal to “pay for performance”.
1. Incentive rewards not aligned with business goals and strategies. It’s essential that organizations (and employees) know what they want to accomplish in the upcoming year. This varies year to year, certainly the measures do. The leadership must be clear of the direction, how the goals will be measured (revenues, % of market, ROI, etc.) and what strategies will be implemented to achieve them. Incentive plans from the top down should be aligned with those measures and reward the desired performance.
2. Vague, unmeasurable objectives. Quantifiable goals, such as Revenue and Net Operating Income (NOI) are easy. Customer satisfaction is an admirable goal, but often a challenge to really define and measure effectively. How is satisfaction determined, is that measure accurate, and how does the employee’s performance affect it? If employees know they cannot impact the results, the incentive plan quickly turns into a negative, adversely impacting performance and morale.
3. Plans too complicated and poorly communicated. I’m a strong believer in the Power of 3. Not more than 3 measures rewarded in a plan, incentives pay easy to calculate, they’re well understood by all. I’ve seen too many plans with up to 6 or more incentive components for which the employee is paid. Too many components diffuse focus on what’s really important and the dollars paid on them are not meaningful. If there not enough money at risk, why bother?
Years ago, I was on a sales team with a plan so complicated and so poorly communicated no one, including the sales manager, understood what the plan actually paid for, or how it was computed. When we got our quarterly checks the amount was always a total surprise and made no sense. Fortunately we all loved the work we did and the dollars were so insignificant it didn’t matter to us at that time.
Pay for performance is a well meaning and often powerful compensation strategy. However, it is critical that incentive plans pay for what is important to the business, the measures are clear, and the plans relatively simple.
