Performance Management Systems and Compensation Plans
Successful organizations achieve their business goals by hiring the right people, communicating clearly the company’s expectations, managing employee performance and then recognizing and rewarding them when the job is done well.
Business owners who understand the following six foundational principles of economics and apply them in the development of their performance management systems and compensation plans establish a powerful connectedness—engaged employees—that helps assure their success.
- People respond to incentives in predictable ways.
You know your company’s goals. Establish compensation, benefits and incentives that reflect those goals. For example, your sales staff should be awarded bonuses based on how they increase profits and not just increase sales. If they’re able to create new business without spending a lot of the company’s money, your profitability improves.
- There’s no such thing as a free lunch.
Resources aren’t without limits and every choice you make eliminates alternative courses of action that were available to you. Shepherd your resources and use them in ways that will promote the achievement of company goals. Compensation plans must fit into your budget, even during off years. Start by ensuring you’ve funded the most critical or essential positions first. Be realistic as to affordability. It’s always easier to add a benefit than to take one away.
- There’s no such thing as just one thing.
Many business owners are looking for that one thing they need to do to jump start the growth of their business. You need to understand there is not just one thing you need to do, but rather many things. Nothing happens in isolation so look for the interrelationships and understand there are always two sides to every transaction.
- The law of unanticipated influences.
The economic world is larger than your business and there are written and unwritten rules of the system. Recognize that your employees will make decisions in the context of the economic system.
- The law of unintended consequences.
Actions always have consequences. Carefully consider your performance management system and compensation plan to ensure it not only meets federal and state laws but also promotes those actions that will support your company’s goals. Recently a national bank paid dearly for the actions of its employees who created fraudulent accounts to meet company quotas. The cost to the bank in fines was immense but the damage to the bank’s reputation will have long-lasting repercussions.
- It’s impossible to have complete control.
Recognize you’re dealing with people who have their own goals and decisions. You’re also dealing with the economic world, with its own unanticipated influences and unintended consequences.
While an understanding of these principles assures you of a good start, it’s important to revisit your performance management system and compensation plan on a regular basis. Conduct routine salary audits to ensure your salary ranges remain competitive for your market. It’s difficult to hold on to valued employees if you fall behind in the salaries you’re offering. Make sure your performance management process works in support of your corporate objectives, clearly documenting the individual employee responsibilities that are necessary to achieve those goals. Quantify the payoff for meeting those goals, then empower your employees to get at it.
Here are a few more points to consider:
- It’s a good idea to evaluate opportunity costs occasionally—what are you sacrificing because of the decisions you’ve made? Is your choice still the best option?
- In today’s connected business world, nothing happens in a vacuum. Look for interrelationships and capitalize where these bring opportunities to your business goals.
- Remain aware of unanticipated influences and unintended consequences. Are your incentives encouraging positive actions or have your employees found a way to game the system?
- Remember always—you are not in complete control.
Bradshaw, Gordon & Clinkscales, LLC has established a solid reputation for being a great partner to successful companies throughout our market area. Contact us to learn more about the benefits we can bring to your business.