Pay for Performance – new compensation practices motivate workers and fatten profits

Retailers are taking a new look at the old way of compensation workers.  Familiar reward mechanisms such as the annual seniority-based salary hike and the automatic year-end bonus are increasingly viewed as relics in need of retooling.

Why?  Faced with increasing competition for the discretionary dollar, retailers feed a greater need to inspire worker loyalty and dedication to the bottom line.  The conventional reward system isn’t getting the job done.

The root problem is that the tools employers use as incentives are too often considered entitlements by recipients, according to Ian Jacobsen, president of Jacobsen Consulting in Morgan Hill, Calif.  “I have yet to meet an employee who, on the first pay day after a raise, says, ‘Wow?  Look at my paycheck.  I’m going to bust my buns for the company because I am so pleased with what I am making,’ “he says.

Worse, the best employees can feel trapped in a traditional salary structure.  “The top performer who sees a slacker receive the same four percent annual bonus recognizes an inequity,” cautions Daniel P. Moynihan, a principal at Compensation Resources, a consulting firm in Upper Saddle River, N.J.  “This breeds discontent.  Without a better incentive to work hard, the employees will tend to do just enough to get by.”  Meanwhile, ongoing salary increases and bonuses bloat payrolls until labor costs exceed the value received and the business becomes uncompetitive.

Growing Profits

Enter the “pay for performance” program, intended to spark motivation by tying a portion of compensation to the actions individuals take to enhance business profitability.  Such performance-based salary increases and bonuses are sometimes referred to as “at risk” compensation.  Because of the link between achievement and pay, the employee who fails to get results risks losing some money, while the go-getter takes home a fatter paycheck.  The result is a win-win situation for employer and worker.

Consider these tips for designing a successful reward program:

• Identify and reward quantifiable parameters that employees can influence with their daily actions.  Need ideas? Ask employees how they measure their own performance.
• Start with salespeople whose work can often be assessed in a straightforward way by tallying retail transactions.  Reward the creation of customer loyalty by assessing who is selling to whom, and how often.
• Assess support staff by asking “What is this person’s job, and how well are they doing it?”  Perhaps a receptionist answers the phone before three rings, greets customers in a cheerful and professional way or volunteers for extra work.

Rewarding Frequently

The traditional year-end bonus comes with a significant downside: because the employee loses sight of the bonus through the year, it loses its ability to motivate.  “The employee who gets a larger bonus than expected may be extra motivated for a week or two, but the value melts with time,” says Jacobsen.  Employees no longer see how the extra compensation ties into their activities, viewing the additional money more as the result of luck than as the reward for work well done.

Far better are periodic performance-based bonuses accompanied by coaching, a combination that sets up anticipatory feelings of success.  Keep employees informed continually about their progress – at least once a quarter, and ideally once a month.  “The value of an incentive plan actually becomes before the payout, when people are informed about how well they are doing against your plan objectives,” says Mac Lon Ding, president of Personnel systems Associates in Anaheim, Calif.

The goal is to maintain what consultants call a “line of sight” between deed and reward.  When this is present, the employee understands how his or her performance affects business profitability and the rationale for the compensation increase.

Tracking Results

Visual cues can help get your message across.  To be sure employees are able to monitor and correct their own behavior, “the ways for tracking performance should be easily understood and sufficiently timely,” advises Jacobesen.  “I’ve used a thermometer when the measures were easily displayed that way.  I’ve used a dashboard or control panel when there were several critical measures.  Display them in a place where everyone can see them, so everyone stays focused.”

Assure success by continually expanding your plan’s scope.  Include more people and develop more refined performance-assessment parameters while soliciting feedback from participants.

Maybe it’s a lot of work, but the payoff can be considerable.  And you really have no choice but to make this investment in your future.  “Performance-based pa has become an expectation and a norm,” says Moynihan.  “Not having it will make you less competitive