Safely Navigating the Pay for Performance Minefield
Pay. It’s the topic we love to avoid. We don’t discuss it with friends or family. It’s a verboten topic at cocktail parties. Heck, we discuss cancer, religion, and abortion at dinner parties more easily than we talk about our paychecks. We don’t even like to discuss compensation with the person whose pay we’re messing with.
Well you know me – I LOVE to talk about the topics everyone avoids. Why? It opens a conversation we, as leaders, desperately need to have.
So in an era of wacky pay debacles (paging Dr. Lewis, Dr. Ken Lewis to the boardroom please) how do you as a leader and executive navigate paying your people (or not paying them which might be just as well deserved)? How do you personally handle getting paid what you’re worth without having angry mobs chase you with pitchforks and torches on their way to key your car? Tough stuff but let’s tackle it.
First let’s cover why we get into trouble on pay then discuss how you pay your folks and finally how you ensure you get paid what you deserve.
Why We Get in Trouble
The biggest mines you can step on in the Banana Republic of Compensationland are failure to have/follow metrics, “fear of flight,” communism, and do-overs.
No Metrics: Many pay debacles are caused because people get “paid for performance” but no one knows what they were supposed to perform. Absent concrete measurable metrics, pay for performance is a joke. The only thing worse than that is paying people anyway even if they don’t hit their numbers. Stupid? Yes. Does it happen? All the time. And many of you know I’ve opined on why hitting the numbers is stupid.
Fear of Flight: The “fear of flight” sob story goes like this: “If I punish him for not making his numbers he might quit.” My perspective: SO WHAT!?!? He missed his numbers. He didn’t get a bonus. If he can’t correlate the two and quits, you’re better off not having that kind of “leader” in your organization. If you give him his bonus anyway, you’re a clown. Sorry. It had to be said.
Communism occurs when we “differentiate” pay for people with no differentiable delta between high and low. You know the scenario – the “poor” performer gets a 1.05% raise and your “high” performer gets 1.68%. Wow. Seriously? Why does communism happen? Because we’re afraid to slope comp aggressively on either end of the scale. It also happens because we do a lousy job of budgeting for such sloping at the beginning of the year so at the end of the year we have no money left to make a meaningful slope. Plan for it people. Plan. Budget. Please.
The “do over” happens when we miss our numbers and say “well the market shifted so we need to re-set our original target and WOW LOOK WE MADE OUR BONUS.” Um. Okay. Again – this speaks to a weakness of leadership to hold people accountable for what they signed up for. Seriously, when is the last time someone had a GREAT year and you went back and said “well the economy was cooking so we need to re-set our original target and oh, sorry, now you don’t get a bonus.”? Never happens, right?
There. I’ve vented. I feel better. Now the fixes.
Paying Your Executives
I know executives have very difficult jobs. I am not kidding on that point. The benefit though is they’re compensated very well for the pain, stress, skills, education, and leadership that are required in their jobs.
The best thing you can do with those executives is split their pay. I like to call it the “commit” and the “stretch.” The commit numbers are the numbers that they have to hit or you fire them. They’re signing up for those table stakes. They’re very attainable (note I didn’t say easy – I said attainable) and if they hit those metrics, they should receive a reasonable reward in the form of a base bonus.
The “stretch” targets are the ones where that leader has to bust their butt, be creative, be a great leader, a strategist, and an all-around outstanding performer. If they hit those outsized targets, their bonuses and comp should be outsized as well. The best way to stay out of trouble on the size of “outsize” is to have the compensation sloped gradually from the commit to the stretch and then cap out at some level above the stretch. Stretch goals can be powerful motivators for high performing leaders and teams.
Again, where we get in trouble with exec comp is it’s either uncapped on the stretch, no one gets fired for missing the “commit,” or there’s no concrete goal to begin with. You’re a leader. I challenge you to hold the line this year on setting goals AND STICKING TO THEM EVEN IF IT MEANS DOING DIFFICULT THINGS LIKE NOT GIVING OUT BONUSES.
Getting Paid Yourself
If you’re reasonably interested in your own comp, I HIGHLY suggest you take an active role in setting your goals this year. If you end up with a messed up goal, you have no one to blame but yourself if you didn’t insert yourself in the process and try to influence the organization to adopt more reasonable goals.
Spend some time laying out your notion of what a “commit” and a “stretch” set of targets are. Explain the concept to your boss. Get her on board with the notion of being able to can you if you miss your commit as well as paying you well if you nail your stretch.
Once you have non-stupid goals established, get out there and execute. And document. Document well. Document everything that goes well (so you can demonstrate you hit your commit) as well as where your misses were (so you can fix them the next time around). By the time you reach the end of the year and you’re ready for your bonus review, you’ll have your self appraisal already written (which we KNOW is a critical element of getting paid what you’re worth).
What do you folks think? How do we need to fix compensation and the practice of dishing it out? What techniques have you seen work? Not work?
Mike,
A lot of good stuff, as usual.
On comment on "uncapped" bonus: I used to work for a company that advocated uncapped bonus for people who are responsible for a revenue stream (sales folks, business unit leaders, etc…) and I found it made a lot of sense. The rationale behind that is that if you are selling soap and supposed to generate $5M in sales and the company budgeted so, everything in excess of that budget is an upside and does not have to cover the same fixed costs. If by dint of an extraodinary work, you end the year with $10M of soap instead of the $5M that were budgeted, and if your company makes 30% margin on variable costs, the company ends up with $1.5M additional unexpected profit. Why would not the soap seller get, say, 20% of that ? Why would the bonus need to be capped ?
A capped bonus is just counter productive. If the bonus scheme is such that the soap seller will not earn a dollar more passed the $6M limit for example, chances are that the guy will start to slow down and possibly delay the soap orders until the next year.
Just my 2 cents on the topic (and forgive the english mistakes from a french follower !)
@Sylvestre – good point. I think in that situation an uncapped plan can work. The only points I'd raise are:
– how bad is the company at forecasting that they'd miss his targeted goal by 100%? You gotta be pretty lousy at figuring out a forecast if you're off by that much (or if you give him such a lowball goal in the first place you're simply costing the company money)
– If said salesperson worked for me, the next year you can be darn sure his commit is going to be $9MM and a stretch of $12MM. :)
Thanks for reading and for sharing your thoughts from across the pond!
Mike, compensation is a little bit science and a lot of art, which is why it produces such weak and inconsistent results. The challenge with compensation plans is that they can and are commonly gamed, which produces tons of unexpected consequences. And once its been gamed, it becomes a silent problem (a problem that is being avoided or neglected), which makes the issue worse. Deming stated, "People with sharp enough targets will probably meet them, even if they have to destroy the company to do so." Unfortunately, many companies are destroyed in this manner.
I believe the marketplace is wrestlying with finding compensatin plans that won't come back and bite them in the you know what.
Just my thoughts.
Mike,
Good points made in your post. A problem we encounter at our company is that the goals that are "agreed" upon is that they are unrealistic and beyond stretch for the basic target and the stretch goals are stratospheric. When management has in place capable people and these people give management realistic forecasts but they are ignored in favor of something grabbed from thin air then getting rid of the "non performers" is a good way for management to shoot themselves in the foot and destroy morale at the same time. The key to any successful compensation plan (that includes an escalating bonus for performance)is rational goal setting. Goals that are set which are unrealistic are recognized by the parties charged with obtaining them and those goals are, in essence, the starter's gun for a year long job search to get away from an out of touch/pie in the sky management team. I've seen this occur in real life – the former "non performers" defected to the competition and crippled their former company.
Mike,
Your comments are very timely as I'm having this discussion with some C-suite executives.
We also need to set realistic expectations with our children about performance and bonus. In our desire to treat everyone equally, we end up rewarding non-performers. If it's Susy's birthday she gets the presents. You get the cake and ice cream and the privilege of being a guest. In school, if you do A level work, you should get an A. Work below that level should be graded accordingly. Inflated grades have made a mess of the educational system. I've had graduate students who have turned in sub-par work and yet insisted that I regrade their exams to "find" more points because they deserve it.
Entitled children grow up to become entitled employees. Do their future bosses a favor and set realistic expectations now.
Mike,
So my company did what you mentioned was never heard of. We had a record profit year, but management cut bonuses by 2/3 from what was comitted to bonuses at the beginning of the year if we met the goals. The justification was that we needed the money to ride through the slow economy. Yet they opted to start building a new multi-million dollar building because of the cost savings with the economy down. To cap it off I didn't get a pay raise, just a minimal one time bonus because pay rates are down. All of this was very demoralizing after we had worked hard all year to meet the bonus goals we all agreed to at the beginning of the year.
Thanks for the chance to vent.
Anonymous
Whoa, Whoa, Mike I usually agree with most of what you report on, however, the compensation issue is a very difficult one and can't be simplified in one short article. As a retired CEO I have found an absolute, people in general are not motivated by money. They all say they are but when it comes to working for the extra I have found in particular with the exec's, they have a financial comfort zone and it is very difficult to get them to reach out past that with the promise of money alone. What was successful for me was to set the realistic goals on a sliding scale with a monetary reward and add to this other upscale gift benefits. This worked remarkably well and got the employees family motivating him/her to attain the objective. Enjoy your article, keep them coming.
Sorry for the delayed replies folks – was serving clients yesterday, got 2 flat tires on the way home (yes, 2. HEY PENNSYLVANIA! FILL A POTHOLE OR TWO, WILLYA?).
I'm going to respond to above comments individually since they're all great and merit a reply.
@Rod Johnson: I concur there's a black art to comp. Whenever I've been involved in creating a comp plan, someone (usually me) is assigned the role of "break the comp plan guy." We then work through all the ways we can think of for gaming the system (and usually find/mitigate a bunch of them). If an organization has never done this kind of gaming BEFORE rolling out the plan, I highly encourage them to do so.
@John – great points. Sorry to hear your leaders are so out of touch. I only have two questions: shouldn't everyone's crazy goals add up to the leaders' goals and ergo they should get canned if the board/owners hold them accountable? And my second question is why do you still work there? You seem like a sharp guy who gets the MAJOR problem… maybe you too might consider taking your talents elsewhere…
@Anonymous #1 – amen to setting expectations in our kids. They have to learn the benefits AND consequences of performance early so they can be fully functional later. At least they seem to have stopped giving out "participation trophies" in schools. Now if only they'd bring back dodgeball… with overinflated rock hard volleyballs… in a half-court gym… with three balls… with headshots allowed. Ahhhh… THOSE were the days, huh?
@Anonymous #2 – I think you work at the same company John does. Holy cow! All I can hope is that management team gets sacked or everyone under them ultimately quits. I'd say give them a Mulligan on this year but if they do it again next year, I'd encourage you to check out the Career section of our blog…
@Ron – totally agree this is too big a topic for a single post and I'm sure we'll discuss it again here sometime soon. The funny thing is, as I read your comment, we're in violent agreement philosophically. You had a sliding scale, performance was rewarded, and metrics seem to have been clear. Bravo. Thanks for the thoughts. Glad to have you as a reader.
Bonuses and Metrics – Our company instituted a bonus plan a couple years ago for people above a certain level. The local director explained that the bonus would be tied to several things including our individual goals and objectives. He warned against making decisions that would maximize our bonus at the expense of the company. To make a long story short, after a reorganization we now report to a different director whose direct report managers have one goal in mind: maximize their year end bonus no matter how stupid that is.