Performance Pay: I Believe in You or I Don’t Trust You?

The performance compensation trend will likely continue to trickle down through most companies. Here at the Compensation Café we regularly discuss how this can be a positive or a negative. We cover who should get specific amounts or types of compensation. We also talk a lot about what people should get and how it should be done. We don’t, however, spend enough time on the “why”? 

It turns out that “why” is often the biggest factor in the success of your compensation programs. This is especially true with anything based on performance. Consider the Olympics. In some countries the attitude is “be great, win medals and you will be rewarded.” In others, it’s “you better be great, and win medals, or great things might not come to you.”

I am fairly certain that both types of countries view their programs as “performance-based”. I am also quite sure that the participants in those programs have very different perspectives on why their countries have those incentive programs. In the world of compensation, it is less obvious. We try not to include overt or even implied threats into our programs. But, in a world where perception is reality, we need to be better at explaining the “why”.

This article started with someone looking at a new program and saying, “why do I have to hit these targets, don’t they trust me?”  Over the prior several weeks, the company had spent considerable time and effort determining performance modifiers that would add up to 200% to each award. The compensation department had two goals. 1) Give a reasonable base award, as related to market data 2) Allow superior performance to leverage those awards to far above market level. Unfortunately, the company had not built the culture of trust required for a program like this. Some employees looked at any unguaranteed compensation as a challenge to their integrity. Performance pay wasn’t viewed as a reward for a job well done; it was viewed as a demand to do more.

The mistrust provided a unique learning moment. Because the company was sincerely trying to do the right thing, they responded to the employee push back with additional and often personal communication. They used this as an opportunity to grow with their employees by spending time to explain why the program was instituted. For some people, they even took the time to show them what the pay programs would have looked like without the performance enhancement (it was slightly better than the performance-based worst case and much worse than the best-case performance-levels) This additional information allowed participants to see their link to corporate success and understand how their rewards were advantageous if they did a great job.

Of course, not everyone was convinced, but enough got on board to provide the program with almost immediate momentum. It is a long-term incentive plan, and we will see if the company keeps the communication lines open and if the employees respond well over the next few years. At the very least, most now believe that the company believes in itself and knows its success depends on believing in the employees. This is much better than a program that says, “Congratulations, I don’t trust you.”

Take a look at your pay for performance program and do this simple exercise. Ask yourself; “Do I truly believe in the power of my employees, or did I put this program in place because I don’t think they will perform without it.” Then consider the same question from the perspective of the employees. If the two answers follow different paths, you know what you need to do.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”,  “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay

Comments

[GIL WALTER]

Dan as always you did a wonderful job in trying to to assist others. Your story should be read by all personnel who operate a business and the peoples who keep this bisiness in shape! I wish you success!

[E. James (Jim) Brennan]

Sometimes standards of performance are defined simply as a CYA for management facing a skeptical board or penny-pinching owners or shareholders focused on dividends. Those groups frequently demand proof that the outcome results that are rewarded actually pay off for them. P4P then becomes a basic matter of mutual self-interest where all parties benefit.

(P.S. to Dan: You really didn't have to ask your brother to write such a glowing endorsement. Your article stands tall on its own merits. ;-)

[John A Bushfield]

Dan - Great post, which provides insight on a number of levels. What's interesting, to me, is the lack of understanding and surprise on the part of both the comp folks and management regarding the reception to what appears to be a fairly significant change in employees pay potential. It also illustrates the need for high collaboration between comp/HR and executive management surrounding pay practice changes. In the end its a credibility issue, and unfortunately, for most companies there ain't none, which makes the introduction of new things highly suspect among those that are supposed to 'benefit'. A lesson for all.

[Dan Walter]

@Jim. Thanks for the comments. And, hilariously, Gilbert is my father!

[Dan Walter]

@John,
I totally agree that the collaboration is often lacking. Without credibility performance pay has no chance of working.