Winners at work take all

Keeping employees motivated with good incentives can be a challenge. But over the past decade there has been a change in the way most organisations go about doing that.

Performance-based or incentive-based pay is common in sport where no win, no reward, is normal practice - if you don't perform then you miss out on bonuses and even a renewal of contract.

But this system is becoming prevalent in New Zealand companies. In fact, an entire industry has sprung up with companies whose primary objective is to determine how much other people should be paid.

Tanya Giles is a senior consultant with the remuneration specialists Higbee Schaffler and says the advantages of performance-based pay are that it's allowing organisations to maximise the benefits of their remuneration investment.

"There is a big amount of investment tied up just in fixed remuneration or base salaries. So really, organisations do need to be clear what they're looking for in that," she says.

Communicating what is expected of an employee through their pay packet is nothing new. Most sales positions have long had some type of commission structure. But regular salaried positions now incorporate some element of performance-based pay.

Giles says: "We advocate performance-based pay in terms of introducing pay differentiation based on performance, not only incentive pay but also in base salary. There is quite a significant opportunity for employers to actually differentiate for that base salary, or come to work money, at salary review time. Instead of going for the traditional New Zealand egalitarian approach of giving a three per cent across-the-board increase to all employees, we encourage all employees to consider that there should be consequences of performance and consequences of non-performance in roles."

Giles says that New Zealand has needed to shift its attitude toward pay.

"I think we certainly have been making leaps and bounds in the last decade. But I think generally our approach to pay is a bit more conservative. I think that comes from having what you might call more of an egalitarian philosophy in our society. Sometimes we're afraid to significantly differentiate between people on things such as pay and performance."

But that's now changing as various industries see the benefits and begin to embrace the idea.

Giles says other countries have been using incentive pay for even longer.

"I think across the board New Zealand tends to be fairly conservative still with respect to performance-based pay. And that's particularly compared to large markets such as the US or Britain where they're potentially a little bit more sophisticated in terms of what they do."

Managers using a performance based pay scheme have quite a bit more leverage when working with their staff.

"They've actually got quite a significant opportunity to use their salary review budget to sort of rob Peter to pay Paul and get some real bang for their buck out of that spend as well."

Higbee Schaffler reports that 83 per cent of organisations in New Zealand are offering some sort of performance-based pay at senior management level. Some 65 per cent of organisations are offering it to employees at the general staff level.

But Giles warns against going into a scheme without thinking it through.

"I think probably the biggest pitfalls for employers is actually just bolting on a performance-based pay scheme without having thought through what the objectives are and what they're looking to achieve with that additional spend."

Objectives need to be clearly identified and quantified, she says.

"If they're going to implement a performance-based pay scheme, they need to think what are they looking to get from that?" she says. "What sort of above and beyond performance do they think that that dollar should return for the organisation? And that's one of the most critical elements of performance-based pay scheme design."

The schemes are typically custom designed because performance criteria can vary from organisation to organisation. But they also vary over time.

"Well designed incentive schemes are going to be driven by performance measures that are particularly relevant to the business at that time. And because the business environment is so fluid and undergoes so much change, incentive schemes or performance-based pay schemes should always have a window as in a time that they commence and a time that they'll be reviewed and potentially pulled out or replaced."

If a scheme is poorly designed and implemented, it can actually end up costing the employer more.

"What they end up doing is actually what we call double dipping or paying for the same level of performance twice." Employers with no experience with this type of pay scheme are advised to trial it out first.

"They can actually have a go at the design, learn some of the lessons and work out how to use performance-based pay effectively in the organisation before spreading it across the employee population."

Giles says all performance-based pay schemes should be implemented at the discretion of the employer. Employees should be told not to rely on the extra money if the scheme needs to be terminated. But employees also need to be kept well informed of what is expected of them in very concrete terms.

"Employees want to have a good understanding of how they can influence their pay based on performance. And if we say things like 'improve customer service', that's a pretty woolly kind of definition. Improvement might mean one thing to one person and one thing somebody else."

Quantitative performance indicators work best with performance based pay.

"In a well-designed incentive scheme an employee would actually be able to look at regular reports about how the measures are going and actually be able to sit down with a calculator and work out what's coming to them when the performance period finishes."

And regardless of what those numbers add up to, the employer should stick to it.

"If the performance measures aren't met, don't make the payment. Because like everything else, the entitlement mentality will grow over time and people will start to count on those earnings."

Just how much of a pay package is determined by performance will vary.

"At CEO level it wouldn't be uncommon to see as much as 15 to 40 per cent of base salary as a target through incentive pay, whereas if you were talking about your general office-based role or what you call general staff, at that level it might be like five to 10 per cent. So the actual amount might be a little bit less than that because obviously not everybody achieves to their full capacity."

"But whether or not all employees will accept this structure is unclear. You'll find some employees gravitate to roles that have a steady and reliable income. And then you get people that are motivated by a challenge and are really driven by that sort of approach."