The critical element in any real performance-based system is that rewards must actually be tied to actions within the direct control of individuals. Perhaps the most common example of this is piecework, where individuals are paid an agreed-upon amount for each defined unit of work they produce. This approach is widely used in manufacturing and farming and should be easy to picture. But let me give you a slightly counterintuitive example. One hotel operating company pays chambermaids by the room, instead of by the hour. The result is a higher rate of hourly compensation and a shorter workday for the maids and millions a year savings to the company. Why can’t the same approach be used with professionals? Accountants could be paid per audit (many are). Programmers could be paid per line of code (many are). Writers could be paid by the word (many are). And so on.
Commission-based sales is another example of real performance-based pay that springs to mind for many. But often a commission-based system only looks as if it is based on actions within the control of the salesperson. Take this composite of a problem I run across frequently in telemarketing organizations.
Say telephone salespeople in company X are paid by commission (10 percent of the actual revenue from their sales), which is common. OK. Now let’s say salesperson #1 does a great job (she makes tons of calls, listens carefully, and says just the right things in response). But #1 is selling a product that has no market reputation and, on top of that, she is working from a list of unqualified customers (there is nothing about the list that makes them likely buyers of the particular product). On the other hand, salesperson #2 is mediocre at selling (he makes fewer calls than he could, doesn’t listen carefully all the time, and says the right things in response sometimes and the wrong things just as often). But #2 is selling a product with a great market reputation and he is working from a qualified list (people who are likely buyers of the particular product). There is a strong likelihood, in this scenario, that salesperson #2 will outperform salesperson #1, strictly on sales revenue. So a reward system based purely on sales revenue would be unfair. Salesperson #1 would suffer and salesperson #2 would benefit for reasons that are beyond their control.
The dilemma presented to managers in this situation, as is often the case, is this: It is very easy, although terribly ineffective and unfair, to administer a reward system based on sales revenue. But it is very difficult to administer a system based on actual performance. As you can see, in order to reward salespeople #1 and #2 on the basis of their actual performance, it would be necessary to measure not only the number of calls each person is making every day, but also to evaluate the technique each person is using on the phone. Is she listening carefully and saying the right things in response? This latter evaluation is probably the most important in terms of really differentiating high performers from low performers. It is also critical to the process of helping low performers improve.
3 Critical Questions
But really and truly measuring and rewarding individual performance takes a lot of time and energy on the part of managers. Any manager supervising the performance of any individual or any team will have to monitor closely. And that’s not all. Evaluating performance is often highly subjective and will require you to exercise your own judgment about the quality of an individual contributor’s work (in the example above, is the salesperson listening carefully and saying the right things?). But exercising your own subjective judgment is often the only fair and accurate way to evaluate performance, so you’d better get good at it.
Your key to success will be establishing clear performance standards for individual contributors and measuring their performance closely and regularly against those standards.
Focus your rewards strategy on three critical questions:
1. Who is in control of the lion’s share of each person’s compensation? The answer should be: Each person. Individuals should never be made to feel that they are competing against each other, but rather that they are competing with themselves against concrete goals, deadlines, and guidelines and parameters.
2. When do people get compensated? The answer should be: When they deliver. The closer in time the reward comes to the performance in question, the more powerful the incentive.
3. In what form do people get compensated? The answer should be: In whatever rewards they value the most that are in your power to offer. It is important to be 100 percent clear about which organizational resources are included in the pay-for-performance scheme and which ones are available to people regardless of performance.
In the end, the key to performance-based rewards is simple: Every individual contributor needs to know that what counts at the end of the day is his or her performance. Some or all of every person’s compensation should be on the line all the time and tied directly to his or her performance.
Never forget, an effective pay-for-performance approach requires all the elements of a well-negotiated purchasing contract:
1. Measurable individual performance benchmarks. Every step of the way, clear deliverables should be clearly defined for every contributor and concrete rewards tied directly to those deliverables.
2. Clear expectations (among managers and workers alike) about the relationship between specific individual behaviors and specific rewards.
3. Regular and close monitoring by managers of individual performance and the keeping of good contemporaneous records (once again, this is high maintenance) and ongoing communication about the process between managers and individual contributors.
It takes time and energy every day. It takes incredibly resourceful managers on the front lines who hoard discretionary resources and then dole them out to high performers in exchange for agreed-upon results. Even without institutional support, managers who embrace the philosophy of paying for performance always find a way. You can do that.
Bruce Tulgan is an adviser to business leaders all over the world and a keynote speaker and seminar leader. He is the founder and CEO of RainmakerThinking, Inc., a management research and training firm, as well as RainmakerThinking.Training, an online training company. Tulgan is the best-selling author of numerous books, including “Not Everyone Gets a Trophy” (revised and updated, 2016), “Bridging the Soft Skills Gap” (2015), “The 27 Challenges Managers Face” (2014), and “It’s Okay to be the Boss” (revised and updated, 2014). He has written for The New York Times, the Harvard Business Review, HR Magazine, Training magazine, and the Huffington Post. Tulgan can be reached by e-mail at brucet@rainmakerthinking.com; followed on Twitter @BruceTulgan; or via his Website, www.rainmakerthinking.com.
