Compensation - A Bridge to High Performance

Compensation: The Bridge To High Performance
Thomas McCoy

Pay – just another budget line item expense...or maybe not.

True, pay is a cost, but if we view it as an expense we immediately set ourselves in conflict with the workforce. This is because the workforce is selling time, its primary resource, and is intent on getting the highest price for it.

However, if we view pay as an investment, concerned only with receiving a reasonable return on our investment, then we can develop a pay system that builds a partnership rather than conflict.

We transform pay from an expense to an investment when we link it to performance, i.e. incentive pay. Incentive pay is a sociotechnical bridge. That’s a fancy way of saying it can be used to link people to an organization’s objectives (business plan), resources (human and otherwise), systems and processes (workflow, operations, etc).

Here’s how it works. Compensation is a powerful communication tool. Start talking about pay and you get everyone’s attention. Link pay to performance outcomes and you have a tool for communication and motivation, the foundation on which to lead growth and manage change.

The process of developing an incentive pay system requires us to define those key elements that add value to the organization. Examples are profit, revenues, expense control, productivity, quality, customer satisfaction...you get the idea. The process also requires us to identify how to measure the performance of these value drivers and establish performance criteria for them (good performance, average performance, poor performance). When we link rewards to improvement in the measures, we establish a powerful platform on which to engage and develop our employees.

A properly designed incentive system encourages the employees to focus on what drives value into the organization. For example; if we tell the workforce they can earn an additional 10% of their pay if customer satisfaction improves by 15%, we most certainly will have focused their attention on customer satisfaction. We will also have developed within them a desire to understand how they can help improve customer satisfaction. If we take the time to educate them as to how their roles affect customer satisfaction (develop their line-of-sight), then we can ask for their commitment to improvement.

Focus, understanding and commitment. Sounds like just the ticket for a successful growth or merger strategy. Of course, growth and managed change don’t happen in a vacuum. Individual employees perform the work that eventually adds value to the organization but to fully capture the benefits of motivated individuals it is necessary to provide the appropriate support and resources. Working as a group or in teams, employees can make a greater contribution than as individuals. Teams, working in a culture of cooperation and in an environment where the systems and processes enhance work accomplishment can make a greater contribution to value.

That’s why HR professionals speak of incentive pay as a sociotechnical bridge. It can act as a bridge to link the social (human resources) to the technical (non-human resources) in such a way as to maximize the return on investment in these resources.

Financial management is essential in putting together the merger and/or running the business. However, experience and the data show that by developing a strategic plan to engage the people in the business plan via the company’s processes and systems, a company can realize a substantial increase in value.

Real value is the result of three elements: a strong history of earnings growth, a focused and dedicated workforce, and a leadership team that can run the business. Incentive pay is an essential element in creating this value but it is only one element. Other elements are People, and how they interact, Processes, and how they contribute to achieving the goals, and financial management. When you get all four in alignment you experience phenomenal improvement in value and, if it’s a merger, you actually realize the benefits promised by the financial analyst.

Case History

A Midwestern manufacturer was suffering from margin pressures caused by overseas competition. Their product, a commodity, could be produced in China and shipped to the United States at a cost that was less than the cost at which they produced. The answer was to engage the workforce in the business to increase productivity and quality and reduce costs. The foundation of this effort was an incentive plan.

They identified the value drivers of the business and designed a ScoreCard™ for each department based on the value drivers they affected. Once the employees understood they could earn more pay by their value drivers, they began to ask questions such as “What do you mean by productivity?”, “How do we measure Quality?”, and the best question; “What can we do to improve results?”

The incentive plan became the foundation on which the company developed a communication and education campaign. Managers held regularly scheduled meetings to discuss how to get a better score on the incentive pay systems known as ScoreCard™. These meetings became discussion-based learning opportunities and the employees began to evolve from hired-hands into business partners. The results speak for themselves.

The Peer Comparison Peers Company Strategic Profit Ratios Profit Margin (pre tax) 1.6% 4.1% Return on Assets (pre tax) 3.4% 3.7% Income Statement Direct Labor 18.7% 12.9% Asset Productivity Ave Collection Period (days) 42.4 37.0 Inventory Turnover (times) 7.6 20.9 Employee Productivity Sales/Employee $ 93,658 $138,053 Gross Margin/Employee $ 26,716 $ 41,852