Compensation Plan Self Assessment

WIN-WIN: A prerequisite in any reward program is the simple premise that it should simultaneously benefit employees, owners and customers. Unfortunately, most reward programs fall short in this area.

BASE PAY: A reward program should NEVER place base pay or compensation at risk. Studies have shown that taking away a portion of employees' pay and asking them to earn it back creates a defensive environment where employees are less likely to take risks to improve performance. Use base pay to guarantee a standard of living, and let rewards -- a variable expense -- provide an opportunity for employees to earn significant amounts above base.

PARTICIPATION: A downfall of many reward systems is that they are limited to a few “key” individuals in an organization. Allowing everyone to participate unlocks the hidden talent lying dormant in an organization. The full potential of any organization will be realized only when everyone has a vested interest in the outcome.

TEAMWORK: Reward programs that are limited to a few individuals or groups create an environment of “it ain’t my responsibility” and “why should I care, it’s not my money.” In fact, they often create adversarial relationships that can be characterized by “why should I work hard when they get all the credit.” A properly designed approach creates an environment where individuals, groups and teams are rewarded for the contributions they create as a whole.

EDUCATION: At issue with traditional reward programs is the concept of “business literacy”. Everyone knows that earnings are important, but not everyone knows where the organization is going, how earnings are created, and how they contribute. Inherent in the design of a good program is the concept of business literacy: teaching everyone where the organization is going, how earnings are created, and how each person contributes.

RESULTS: Rewarding for activity leads to more activity. The shortcoming of such an approach is that increased activity does not always lead to improvement in profitability. Well designed programs reward for results, not activity. Activities should be managed in order to achieve the desired results.

BALANCED SCORECARD: The “balanced scorecard” approach recognizes that success across multiple dimensions is vital to an organization. Accordingly, measures should be created for each vital dimension. Doing so creates the balance that is lacking in many reward programs. A balanced scorecard approach will teach your employees to consider the implications of their actions across multiple dimensions when making decisions.

WEIGHTS: One of the most common mistakes in reward programs where multiple measures are used is the way each measure is weighted: it is usually a subjective exercise. The best way to weight multiple measures is by determining their impact upon the bottom line. Measures that create the most economic value should be weighted the highest. Doing so creates an effective tool for prioritization that directs employee efforts toward putting more dollars on the bottom line.

OUTCOMES: A well designed program that creates reward from results, not activity, enables an organization to precisely compute how much reward will be created for corresponding levels of performance BEFORE the program begins. This completely eliminates the subjectivity that often prevents employees from “buying-in” to traditional reward programs. More importantly, communicating the reward opportunity before the program begins creates a “shoot for the stars” attitude within the organization. Employees, knowing that significant reward opportunity exists, should demand that they be allowed to go after it.

SELF-FUNDING: A self-funding reward program is one that creates a reward pool by sharing a precise amount of the economic value created by performance beyond a minimum threshold of performance. A properly designed program will guarantee an acceptable level of profitability or return no matter how large the reward pool becomes.

UNLIMITED REWARD: Another common mistake in program design is the placement of a “cap” or limit on the amount of reward that can be earned. Performance will stop once the cap is reached. In addition, performance is often “held back” or “deferred” until the next reward period when it can be applied against the new cap. A true self-funding program should never place a cap on reward. Rather, it should create an unlimited reward opportunity using a predetermined distribution format.

UNDERACHIEVEMENT: Unfortunately, many reward programs do not penalize for underachievement, thus creating an entitlement mentality. In the same manner that the reward pool should never be capped, there should not be a floor on the reward pool penalty. Again, base pay should never be put as risk, but the program needs to guarantee that rewards are tied directly to changes in overall profitability.

GOLDEN HANDCUFF: An excellent way to eliminate the perpetual focus on short-term results is the use of deferred rewards. Deferred rewards are usually limited to officers and key managers whose individual actions can directly impact the bottom line. The deferral period should be consistent with their “decision making horizon” -- the period of time it takes decisions to fully impact the organization. In addition, a deferred payout creates a “golden handcuff” that will lead to the retention of the best employees.

OWNERSHIP: The bottom line is that a well designed and implemented reward program should create an environment where employees think and work like owners.