Pay
for Performance, ("P4P" for us cool compensation pros) is all the rage.
Those of you who read my postings regularly know that I’m a big
proponent of performance-based compensation, in its many forms. Despite
being a big supporter, or perhaps because of it, I think its important
to discuss the major risks involved with these programs. (If you deal
with this issue frequently, you might want to skip to #4.)
1. Incorrect Metrics
Metrics are the “things” that are being measured. These are the
foundation of your plan and must represent the measurements of success. I
will save you the time of repeating what I, and others, have already
said. A couple of interesting articles are here and here.
2. Poorly Set Goals
Goals are the levels that define the success of each metric. These
are the drivers of your plan and must represent your destination. Again,
I will save time, by pointing out some other articles, here and here.
3. Underwhelming Communication
Performance compensation is often confusing. Clean, clear
communications are essential to engaging and motivating your staff. This
is a topic we cover here often at the Compensation Cafe. Some good
examples are here, here and here.
4. Human Nature
Human nature is the one thing that you cannot build into your
compensation programs, yet it is the single biggest risk to pay for
performance. A colleague of mine often says that the problem isn’t that
P4P programs don’t work well, it’s that they work TOO well. Results and
actions must be in alignment. Many companies create great metrics, goals
and communications and still have compensation plans blow up. Why is
this? For programs that demand high-performance, you must also provide
strong management and oversight. Many companies use their compensation
plans as a form of management. This may lead to participants slowly
defining the good and bad.
Recently, it was discovered that one of the most successful teams in
the NFL, the New Orleans Saints, had created a pay for performance
program that inspired great results at the expense of terrible actions.
Defensive players were provided incentives to not only stop their
opponents on the field, but to literally make sure they could not return
to the field.
While this program was in place, the Saints (at best an ironic
moniker) won a Superbowl, the sports ultimate prize. They also injured
many opponents. In the end, the largest fines and strongest suspensions
in league history were handed down. The Saints, the NFL and several
other teams will suffer for a long time because of one bad pay for
performance program.
Similar problems potentially exist for every performance-based
compensation program. We have seen negative behavior in the past. Often
this behavior has resulted in a lucky few being paid handsomely for work
that ultimately resulted in catastrophic consequences. In many cases,
the blame was based on compensation, but I would argue that compensation
is a symptom, not a cause.
Some people’s human nature is to stretch rules as much as possible.
Others feel that they are not doing anything wrong as long as they are
not called out. A small minority simply doesn’t care about rules at all.
They will do whatever it takes to win today, even if that means losing
in the long run. Human nature is as varied as humans themselves.
Our only defense is in knowing that the ends don’t always justify the
means. We must put as much effort into managing performance and guiding
our staff as we do into the purely compensatory aspects of our work.
Compensation plans will never replace good management, but tragic ends
will almost always result from poor management.
Dan Walter is the President and CEO of Performensation
an independent compensation consultant focused on the needs of small
and mid-sized public and private companies. Dan’s unique perspective and
expertise includes equity compensation, executive compensation,
performance-based pay and talent management issues. Dan is a co-author
of “The Decision Makers Guide to Equity Compensation” and “Beyond Stock Options.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts a
free networking group. Dan is frequently requested as a dynamic and
humorous speaker covering compensation and motivation topics. Connect
with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay