Paying for performance

Money is not the best way to motivate workers. But having a financial incentive scheme tied to employee performance is a good way to align people with the strategic plan, says John McGill, director of remuneration and performance specialists Strategic Pay.

"What we always say with incentive schemes is that apart from a few specialised groups, it is about alignment of organisational strategy and individual achievement," he says. "It's not about motivation in most instances. To dangle the money out in front like a carrot is, in most instances, an ineffective way of doing it."

McGill says New Zealand organisations have had mixed success in implementing incentive schemes.

"Often organisations and individuals don't appreciate the pitfalls and the dangers that such a different way of looking at jobs and a different way of paying can bring to their organisation."

But that's no reason for companies to go with a one-size-fits-all remuneration scheme. In fact, McGill says giving all employees an across-the-board raise is a destructive thing to do.

"It's a message of mediocrity," he says. "You're not sending any sort of positive messages to your good performers. You're not sending any clear and unequivocal messages to your poor performers."

In most cases it's the senior management who have some level of their pay which is at risk and dependent on the performance of the organisation. But McGill says workers at any level in an organisation can benefit from incentive schemes.

"There's no reason why secretarial or clerical roles shouldn't be on some short-term, productivity-based incentive scheme. They can add to the organisation's efficiency in their area just as well as any other role can."

But for the big bosses, incentive schemes can lead to some interesting propositions.

You can imagine the scenario he says: "We'd love to pay you more money, but we have to see more results to do it. We know you're running a $10-million-dollar business. That's good. You're established. You look after your people and you do a good job. That's fine. We're paying you for that. Now, if you can turn it into a $20 million business, we're going to make it worth your while - seriously worth your while."

And when the stakes are that high, some incentive schemes are set to make some top execs very wealthy.

"With my more successful private sector clients I see no concern about having high leverage between up to 100 to 150 per cent payouts if the performance is there," says McGill. "They know if their senior executive is going to be paid 150 per cent of their base pay, some good things have happened to their shareholder value."

In order for top management to take the risks they need to in order to succeed, they need to see what's in it for them.

"Just remember what we do when things go wrong," he says. "We don't start firing the receptionists. It's the chief executive and the board that get it in the neck and are asked to move on. They take the biggest risks with their careers. So, they get the nicer rewards for that."

McGill believes that well-designed incentive schemes will not only pay for themselves but allow businesses to temper their costs.

"The employees are pushed a bit harder and get the rewards, but it's not a given. Whereas if you load up the base pay, you're just adding to your fixed costs and you've got nothing to drive them back down if your organisation or the economy takes a downturn."

Performance-based pay is a big leap for a country which is still trying to shrug off a hangover from the entitlement era.

"People believed that the structure of the rewards they received was their right and the employers had no right to interfere with those."

Helene Higbee, director of remuneration specialists Higbee-Schaffler, also says that New Zealand is slow to embrace incentive schemes and is risk-adverse when it comes to pay.

"We come from a more socialistic egalitarian society," she says. "We have a tendency to treat everybody about the same and what that does is de-motivate top performers to just work at a mediocre level."

The relatively small and informal nature of New Zealand business might also be to blame for the slow uptake. Higbee says New Zealand lags behind Australia and the United States with an average amount of variable pay at 17 per cent of base pay for mid level employees. That rate climbs to 25 per cent for management. But she says Australia is 30 per cent for mid level employees and 50 per cent for executives. In the US the figure often goes as high as 100 per cent at-risk pay.

Higbee says all remuneration should be linked back to performance and not just in a small token way.

"What makes no sense at all is to pay out $50,000 in base salary and expect any performance necessarily for that. Employers sometimes cluster all the performance expectations in that little 10 per cent bonus or incentive on top and then think they're going to get value for money and wonder why it's not working."

Higbee says performance-based incentive schemes are not intended to be a key motivating tool. It's not a human resources activity. Incentive schemes are a business performance tool designed to keep daily activities in line with the business plan. Higbee says that KPIs should not be based on activities but instead based on outcomes and results which are directly linked to the business plan.

"Here are the six things that you have to deliver in the context of your job. Most of these are covered by what we pay you in base salary. So we expect a certain level of performance for you to be in this job and for us to pay you."

When a KPI has a dollar figure attached to it, it is an obvious marker. But the softer indicators of performance are more difficult to measure. Selecting which KPIs should be involved in the incentive scheme and therefore determine the at-risk pay is vital. Higbee says incentive KPIs need be targeted to keep from becoming diluted.

"Incentives should be one or two but no more than three KPIs that they can then focus on, that they are prepared to put additional money to say, 'I really want you to focus on these'."

For an incentive scheme to work, it needs:

* Good managers to coach and drive performance

* Workers who are satisfied in their role and will be motivated

* A proactive performance management process

* Tangible consequences for good performance and poor performance

* Incentive schemes are more effective at aligning activities to business goals rather than motivating people.

"Your higher performers are as motivated by achieving as they are by remuneration. Typically it's an internal sense of achievement. If it gets publicly recognised then that's even better."

Just throwing in an incentive scheme into an organisation with a bunch of unmotivated workers is not going to change their behaviour.

"It's probably a relatively small per centage of workers who are motivated purely by money. Most high performing employees are motivated by growth opportunities, challenging jobs and alignment with a company's values and culture."