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Into the heart of Compensation Systems design
February 2, 2015 | By Neil Ducoff | No Comments
In its most simplistic state, a compensation system buys time from an individual performing work. That’s the easy part; everything beyond this point becomes progressively more complicated. Can the individual perform the work and deliver on expectations? Can the individual fit the company’s unique culture? Does the individual have the desire and drive to grow and excel? Is the individual coachable and adaptable to change? Will the individual show up on time … or show up at all? Will you feel like you’re getting your money’s worth every time you hand over a paycheck?
As previously stated, buying time from individuals is the easy part. Designing the components of a compensation system that drive the right outcomes is the tough part. There is a “layering effect” that begins with the actual dollars to be paid for the work and compounds all the way up to a career and income growth path. Every layer is a joint effort that links the thinking and behavior of employees and leadership in order to create the right outcomes. The concept of “pay for performance” is seriously shortsighted. It sets both employees and leaders up for frustration and failure because just paying for performance – handing out a paycheck – is no guarantee that genuine work will occur.
Here are some No-Compromise Leadership insights to expand your understanding of compensation systems design:
- Control the “elephant”: Payroll represents one or more line items on a Profit and Loss Statement. Your department and overall payroll percentages are, and always will be, the elephant in the living room. As the leader, it is ultimately your responsibility to control your payroll percentages and maintain them within manageable levels. Your Cash-Flow Projections (budget) set the limits for payroll spending. Your Profit & Loss Statement tells you how well you adhered to budget projections. FACT: Your Cash-Flow Projection is your boss. Any pay increases or unapproved hires act as an open invitation for a cash crisis. If you don’t know your payroll percentage benchmarks or how to create and live a Cash-Flow Projection, it’s time to schedule a comp coaching call with Strategies.
- It’s about “Overall performance”: A well-designed compensation system encompasses all aspects of performance including accountability, attitude, teamwork, skill development, cooperation, support of company change initiatives, and more. If you’re compensation system is still stuck in the “How much did you sell?” box, you are attempting to compensate sales and output at the expense of the skills, cultural behaviors and individual strengths that actually create the sales and output you’re looking for. FACT: “What gets rewarded gets repeated” is misleading … if you don’t nurture and compensate the cultural behaviors, teamwork, skills, strengths and abilities of your employees, you’re missing 70% or more of the essential qualities that actually produce your sales and output goals. It’s like telling individuals to “sell more – do more” when they don’t know how to do so. Compensate for the right thinking and behavior, and you’ll get the results you want.
- Pay for what you’re really fighting for: It’s really not about the work … it’s about achieving the company’s vision and building a world-class brand. Do you want to pay for sales and volume output or do you want to pay individuals to grow an extraordinary company? FACT: In the daily battle to generate revenues and get the work done, it’s easy to forget what you and your entire team are fighting for. You’re working to make the company’s vision a reality while creating growth and income opportunities for all team players. If you’ve acquired a case of tunnel vision that has you seeing nothing but numbers, you’re avoiding the achievement of your company’s grand vision. People fight hard for a vision and winning, but fighting for numbers is exhausting and frustrating, and can wreck a company’s culture.
- Commission is a trap: Commission has been and always will be an “I/me/mine” pay system that suffers from a seriously narrow scope because it’s all about sales at the expense of everything else. FACT: Commission isn’t the all-powerful motivator it’s often cracked up to be. Because commission is pay based on a percentage of individual sales, it can and will have you paying for a lot of performance and behavior you don’t want. When your commission rates are no longer sustainable, any adjustment winds up as a boat-rocking pay conversion. And if you didn’t adjust deep enough, you can still end up with an unsustainable payroll percentage. This isn’t easy stuff to figure out and navigate on your own. Call Strategies if you need help. We deal with this stuff all the time … and we’re damn good at it.
- Status reports matter: Do you do quarterly performance reviews at least once a year? That’s my favorite Neilism, and it always gets a chuckle, but the truth remains that delaying or ignoring performance reviews is an inherent problem in too many companies. FACT: If you’re going to pay an individual tens of thousands of dollars a year, don’t you want to ensure that you get the very best return on that investment? Of course you do … and that’s why performance reviews and one-on-one’s deliver consistent open, thorough, honest and respectful feedback with employees. Neither your company nor your employees run on autopilot. Getting teams of people to perform at their extraordinary best is ALWAYS a high maintenance endeavor.
- Appreciation matters more: Yes, people work for money and to earn a good living. But people desire to be treated as unique individuals in the workplace. People crave to be recognized and appreciated for the individual strengths and talents that they bring to the team. Too often, organizations look at people to see who most closely fits the “organizational mold.” FACT: Harnessing the energy that comes from individual strengths can make a formidable team more capable of delivering results at a phenomenal level.
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