"The belief that a performance compensation system creates employee accountability is wrong, just as wrong as the company that believes Christmas bonuses create productivity." Tony Burruano, CEO Burruano Group
How to Prepare for Performance Pay Systems
- Create a plan of revenue and profit that is achievable to your revenue and profit goals for the twelve month period for which the performance pay system is intended to be in effect.
This plan should define:
- The critical processes to be accomplished
- What specifically is expected of the critical people around those processes
- The methods of measurement available to your company
- A monthly financial forecast of that plan that includes the dollar results you desire
2. Test the concepts of the plan for three months.
Explain what you wish to accomplish with your plan to your key or critical people. Let them know that prior to the implementation of a performance incentive program, there will be a three month test period. Reward them if they achieve their objectives for this three month test period. You will know your company is under control when it achieves its objectives for a three month period. A company out of control will never succeed with a performance compensation system.
3. Learn how to measure what you have defined as critical to the success of the plan during the three month test period.
Measurements should be timely: daily, weekly or monthly as required. Measurements need to be accurate; and the critical people that receive these measurements or "score cards," need to be responded to. Respond by explaining to them what they did right if it is working so they repeat it, or immediately correct what is not working and explain to them the stated timeline of correction and the result intended.
4. Re-interview your key staff. Rate them as an "A" player, "B" player, or below.
Determine whether you have the right employees in the right positions. Imagine starting your company over again with all the knowledge of the business you have acquired and with the customers you currently have. What do you consider the optimum organizational structure, staffing and correct pay rates? Identify those in your current staff who fit perfectly (an "A" employee), who is almost there, (a "B" employee) and forget about everyone else. That process should be revealing. You need to staff with "A" employees at critical process and management positions within two years.
"B" employees moving rapidly to "A" levels are fine. "A" level employees moving quickly to "B" are not. Forget about anyone else. There is a series of books available by Bradford D. Smart, Ph.D. called "Topgrading," which describes this process. Reading about the process is a good preparation for top-grading your employees. Read other books such as "Good To Great: Why Some Companies Make the Leap...and Other's Don't," by Jim Collins, which describes the difference between being OK as a company and being a top performer.
5. Consider exactly how many years you would like to keep a key manager or employee.
Considerations of age, replaceable skills, importance to the revenue and profit plan and their ability to enhance your business team are critical to this precursor to "golden handcuffs" (a system of financial incentives designed to keep an employee from leaving the company). You can also determine what is important to the key or critical employee for a three year period (money, security, etc.) in the interviews. A "non qualified" plan of paying for long-term disability insurance and life insurance for key people is a method of avoiding additional payroll taxes, pension or profit sharing costs and workman's compensation costs on some of the currently paid incentives earned.
You Are Almost Ready
Assuming your test period was successful, the feedback from the employees was positive and your measuring systems worked. You are able to take what you learned and "fine tune" the business plan, performance standards and pay for
