Accountability and Incentives for Rewards: How Disconnected Are They?
Over the past few years, I have made it a practice to ask friends, college classmates, and business contacts the question “During your career, what changes in management have you observed, particularly in the past five years?”
I expected to hear about trends like the need to be more customer-centric or the move toward outsourcing. Instead, many people told me about seeing a sharp escalation in the tendency of businesses to hold managers and employees accountable for results. They said there is now no place to hide in an organization if you are not a value-adding producer. If you are not delivering expected outcomes, your job security or your job position is at risk.
It is a fact that competitive pressures in the commercial sector and increasingly activist board-level governance have led to the demand for greater accountability. Underperformers are increasingly being detected and their career paths adversely affected. In higher education, the tradition of faculty tenure is gradually being abandoned. I am not trying to characterize organizations as cruel and insensitive entities that treat employees as disposable parts, but merely pointing out that economic forces are bringing pressure on organizations for higher yields with the same or fewer resources.
How fair and equitable is the process of evaluating individuals? Do performance measures cause the desired behavior that management seeks? Can adopting the full vision of enterprise-wide performance management remedy these problems by deploying effective incentive, reward, and recognition systems?
REWARD PERFORMANCE YOU WANT TO ENCOURAGE: BUCKS FOR BEHAVIOR
Many organizations have implemented balanced scorecards and use the results to determine bonuses in pay. Regardless of how fancy and eye-appealing the visual meters and dashboards, at the core of a balanced scorecard is the selection of appropriate measures and how many to use. (See Chapter 18, “How Are Balanced Scorecards and Dashboards Different?”) If the wrong key performance indicators (KPIs) are chosen, then the behavior, priorities, and decisions of employees and their organization as a whole will not be well aligned with the direction of the executive team. And if the KPIs are appropriate but too many KPIs are assigned to an individual, then the employee’s ability to focus is diluted. I advocate no more than three KPIs per employee. With hierarchical cascading and linked KPIs, which are traits of a good balanced scorecard, that individual’s supervisors will have higher-level KPIs that can be included in the weighted-mix formula of the individual’s cash bonus.
To complicate matters, if performance incentives are not strong enough or not adequately linked to employees, then there will not be sufficient traction. For example, receiving a tiny cash bonus or one that results mainly from high-level companywide measures (such as the company’s year-end profit) may not motivate individuals. And if the KPIs are simply the traditional measures of the past, then do they measure what can be measured? What should they measure to realize the executive team’s strategy?
For decades, compensation consultants have proposed elixirs, such as profit-sharing pool bonuses or gain-sharing, but are they enough? If working harder to earn a higher cash bonus motivates an employee, how focused will that person be if the contribution she makes has minimal influence on the overall results of the enterprise? Will the distribution of cash bonuses be equitable? The term pay for performance (i.e., a bonus contingent on varying results) has been around for years, but the “performance” measured is typically not directly under the employee’s control.
HOW EFFECTIVE ARE PERFORMANCE MEASURES WITHOUT CONSEQUENCES
Historically, economists have wrestled with determining the appropriate organizational structure for implementing business strategy. In the 1970s, Professor Alfred D. Chandler of the Harvard Business School led the field with research and published articles that explored three Ss of management: strategy, structure, and systems. Businesses have constantly shifted organizational (i.e., human) structures to attempt to achieve better performance. But advocates of the balanced scorecard with KPIs that are determined by linked organizational objectives in strategy maps believe that there may never be a perfect organizational structure. The essence of the balanced scorecard is to focus less on the organizational structure and more on designing a managerial system that aligns an individual’s behavior directly with the executive team’s strategic objectives through cascading and linked KPIs.
In an article published in the World of Work journal,1 two compensation specialists with Sibson Consulting compared successful implementation of a broad-based compensation incentive system to building a bonfire on a beach for an all-night gathering. It takes a powerful spark to ignite the fire, a carefully constructed foundation, and stamina to keep it burning throughout the evening. The article confirmed my belief that the foundation of an incentive system is critical. Three components of the foundation are relevant:
1. Seeking involvement from employees in selecting the KPIs, thus gaining their buy-in and commitment
2. Setting objective, quantifiable, and agreed-on measures
3. Recognizing employees with a carefully weighted bonus formula that differentiates overperformers from underperformers2
Of course, any performance review that affects an individual’s compensation should contain elements of work behavior (e.g., their personal skill and behavior growth) as well as the enterprise’s financial results. The case I am making here is that additional elements should be included to show how the individual is contributing to results that align with the executive team’s strategic objectives.
The full vision of performance management is not only to integrate all methodologies and systems, but to position all of them on a common information platform where the data is cleansed, integrated, and reliable. This eliminates the excuse that the administrative effort to operate a complex contingent pay-for-performance system exceeds the benefit.
A WAY FORWARD
Can employees handle several weighted factors in their bonus equation to determine their compensation incentive? The compensation consultant I referenced earlier said no. However, Bob Paladino, the balanced scorecard project leader for Crown Castle who received the top honor in 2005 from the Balanced Scorecard Collaborative,3 argues the opposite in his presentations at conferences about his company’s scorecard implementation journey. His ideas are captured in his book, Five Key Principles of Corporate Performance Management.4 Paladino describes the husband of an employee who approached a high-level executive in the aisle of a supermarket to ask, “How will the company end up at year-end with our safety index?”—a reference to a KPI affecting his wife’s bonus. The startled executive initially asked the spouse, “Why would you want to know?” to which the spouse replied that his family was considering purchasing a new lawnmower and he was wondering if they would have the extra money to afford it.
The message here is that if a spouse can track KPIs and equate them in cash to an expected bonus, then maybe employees can handle multifactor weighted incentive formulas where some of the factors reflect the individual’s performance regardless of how well or poorly the organization performed.
Organizations should not get it backward. Those that say “The bonus plan does not work, and that is why we were unsuccessful” are confusing the roles of manager and executive. It is more likely that the strategy was unsuccessful, and the employees were striving to meet poorly chosen objectives.
Ultimately, leaders must be able to communicate their vision of what success looks like if everything goes as planned. Leaders must inspire and empower others, combining their aspirations with delegated accountability. This is a cornerstone of performance management. Strategic vision has to be cascaded through the organization so everyone aligns. In communicating the vision, the rewards system is important, but there are other factors. The executive team should also consider nonfinancial incentives and motivations for employees to perform. It is important to create and develop effective employee teams with favorable group dynamics and the right interpersonal behavior.
Performance management is a powerful way of linking employee behavior to the strategic intent of the executive team. And it provides business intelligence supported by predictive analytics, giving managers and employee teams the information they need to make better decisions and perform trade-off analysis. This is not just about monitoring the dials—it is about moving the dials.
1 Christian M. Ellis and Cynthia L. Paluse, “Blazing a Trail to Broad-Based Incentives,” World of Work (Fourth Quarter, 2000): 33-41.
2 Rosabeth Moss Kanter, “The Attack on Pay,” Harvard Business Review (March-April, 1987): 61.
4 Bob Paladino, Five Key Principles of Corporate Performance Management (Hoboken, NJ: John Wiley & Sons, 2007).
Chapter 15 of our text talks about bucks for behavior. We’ll be introduced to the notion that the type of behavior we reward is the type of behavior we will get. Take a moment to contemplate this concept then look at your own or previous employers and the “bucks” you received. What kind of behavior did the rewards you received prompt in you? Emma wants to have a discussion on what kinds of behaviors various types of rewards will elicit in CM Tech employees.
- In your initial discussion post share with your classmates three types of rewards (base pay, overtime pay, profit bonus, sales bonus, project bonuses, piece pay, vacation, the sky is really the limit.) and what kind of behavior you think each type of reward would elicit from CM Tech employees. Do you think those three would be effective? Why or why not? In your responses to your peers expand on your agreement or disagreement with the behaviors the types of rewards would elicit and share any experiences you have had with the reward types the group has shared.
- Support your initial post with at least one scholarly reference.