Should we Pay for Performance? What do you think?

I’ve seen this done a few ways – invariably, sizeable performance-based incentives leads to myopically looking at whatever levers generate the biggest bonus for the individual – often at the expense of the whole. Not to mention gaming metrics for the purposes of bonus enhancement (see Wall Street).

I’d be more in favor of a gainshare program where the incentives are tied to the overall company performance, vs. individuals, departments, cells, etc. That way there’s at least a tie-in to the organization as a whole, which at the end of the day is the only performance that matters.

I agree wholeheartedly with James Considine above. I’ve seen very nasty gamesmanship and the creation of kingdoms/silos warring with each other under individual pay for performance plans, especially with they are competitive vs. cooperative, like G.E’s system where there can only be a few top performers, a large group in the middle, then the bottom 10% who are let go. When we think about it, doesn’t most everyone work within a system? Do we want to reward heroism or promote teamwork? Public recognition (and even private) and praise is much more meaningful for the most part.

It sounds like you are looking for an overhaul of your system of performance reviews and pay increases. I suggest the book “Abolishing Performance Appraisals: Why They Backfire and What to Do Instead” by Coens and Jenkins.

In it, the authors deconstruct the appraisal and merit pay systems in place at most organizations by revealing the unhealthy assumptions inherent in the practice. They addresses the two key questions you ask above.

And yes, the title is likely to shock anyone who sees the book on your desk – just as Deming’s comments would.

This is a tough question. Measuring up is the best way to gauge rewards. i.e. Give rewards based on team performance. Performance metrics should be related to operating profit of the unit. The unit has to be small enough that individuals can feel that their efforts will pay off. The team should also be able to get rid of low performers who are dragging down performance and refuse to improve their skills or work products.

However, the scheme above only works for companies that have stable and low marketing and sales costs per person, and steady demand for the products. Otherwise, sales and marketing costs can eat through profit margins very quickly and a productive and efficient team can have their bonuses eaten up by unpredictable sales and marketing costs.

For sales folks, the best compensation scheme is one that bases commissions as a percentage of the profit, where profit is the product price less the product cost, marketing cost, and sales cost. That leaves the sales person free to do whatever he wants to make the sale, as long as he is profitable. If the product is sold at less than the costs of product, marketing, and sales, then there is a negative commission which carries forward until profitable sales cancel it, or the salesman is fired. The costs of account management should also come off the commissions. This gives sales people strong incentives to price products properly, find good long-term customers that are high profit and low-maintenance.

For product development folks, don’t offer any bonuses. Their work is too unpredictable for bonuses to have any meaning. We’ve all seen mediocre product people make great money because they were a part of a great organization, and we have seen product development superstars make no bonuses because they built great products that the company couldn’t sell. For product development people, offer company stock as a part of their compensation package so that they have an immediate vested interest in the corporate valuation.