Goal setting is tricky business. You’ll get much better performance if you set two goals for your team. Once you’ve done so, paying for performance is more of a math equation than it is black magic.
Incentives can, and have been, a topic of great discussion but one thing that is hard to argue is this: you want to complete a goal, incentives work.
Sometimes incentives are money. Incentives can be salary increases or bonuses. You may offer stock or options. Other incentives can be awards, time off, or promotions. Incentives need to be something that’s meaningful and exciting to your team, collectively.
When you set the incentives, make a direct linkage between the goal and the reward. I’ve always liked setting “commit” and “stretch” goals. The commit goal is something where folks are signing up to deliver it no matter what. There’s zero bonus associated with hitting a commit. It’s the “you did your job” level of goal. A “stretch” is the furthest point that folks think is in the realm of possibility. They have an idea for how they’ll achieve 70% of it but no clue where the last 30% will come from. And to be clear – that first 70% will take a lot of blood, sweat, and tears to hit. With a stretch goal, people can max out their bonus.
If you have a commit goal and a stretch goal, put the bonus on a sliding scale between those two instead of creating an all-or-none scheme. A “commit” goal is the minimum that someone will deliver to the organization. At the “commit” the bonus is zero. A stretch goal is a high level of impact that will take a tremendous amount of effort to achieve. If someone hits their stretch, the bonus should be 100% of what’s available as an incentive.
Teams can get extremely frustrated when they hit 85% of their stretch goal and they get nothing for it. They should get 85% of the possible bonus. I’ve been in both of these situations. I was in one organization where we had a commit of $50 million of profit and a stretch of $75 million of profit. At $50 million dollars, our bonus was going to be zero. If we hit the commit, there was no bonus. At $75 million of profit, the bonus was going to be 10% of our salary.
At the end of the year, we had hit $62 million. We got a 5% bonus because we made it halfway between the commit and the stretch. There was a sliding scale. Did we get all the potential? No. Were we happy with a pretty good sized bonus for the effort we turned in? Absolutely.
I know another organization where the division failed to meet its goals one year and they got zero bonus, which was appropriate. They missed their goal. They missed their commit.
The next year they worked really hard. They exceeded their goals by 20% so they were into that stretch territory. The bonus should’ve been pretty large. However, corporately, the entire organization missed the high-level commit goal. What the organization decided to do was zero out everybody’s bonus. Nobody got an incentive that year, even the division that had exceeded their goals by 20%. Needless to say, everyone was pretty frustrated with that situation, and the next year, when it came time to exceed goals, they looked at it and said, “Why should we bother? We won’t get a bonus this year anyway.” The incentives weren’t properly constructed to drive the right behavior.
When you look at your goals and your team, think through the incentives. Think through what they get if they hit the commit. Define what they get if they hit the stretch. Spell out how you’re going to create that gradient between the commit and the stretch to compensate them appropriately for the efforts that they turn in. With clearly defined goals and easy to understand levels of upside, you should see their behaviors match the performance you’re looking for.
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