In this downturn, few issues have been shoved into the spotlight as forcefully as incentive compensation. Massive payouts at the executive level have garnered most of the attention, but incentive payments to non-executives dwarf these awards. AIG, for example, famously paid $165 million in bonuses to executives in its financial products unit, but it will likely end up paying $450 million to employees in that division.
While business performance management (BPM) may not be the panacea for problems like these, it can help organizations to improve the effectiveness of their incentive programs. Here are four reasons why these programs go wrong and how BPM can help:
- Incentives are not tied to metrics that employees understand or can identify with
One measure that companies often use to determine incentive compensation is earnings per share (EPS), yet few employees below the most senior executive level have any insight into what drives EPS. Most would struggle even to calculate EPS, let alone make decisions based on how their actions might affect it. The BPM solution: Create a hierarchy of measures that takes esoteric indicators (such as EPS) and breaks them down into markers that employees can understand and affect.
- Performance isn't clearly quantified and communicated
Almost every manager avoids open, honest, frequent performance review discussions, and nearly every employee has been the victim of poor reviews. Add to this the challenges that most organizations face in producing and distributing accurate, timely, performance-related information, and it's not hard to understand why employees sometimes can't see the connection between performance and incentives. The BPM solution: Use a BPM application to deliver critical metrics to each employee. These should be tied directly to the incentive program. BPM software can help the organization to clarify and communicate its expectations and to show employees how performance relates to stated goals.
- The link between performance and compensation isn't openly visible
Most organizations fail to provide their employees with a clear description of the specific actions that will result in increased incentive compensation. Talking about the relationship between incentives and performance is often taboo. The BPM solution: Include incentive goals and the corresponding incentive values within the hierarchy of measures so that the relationship can be clearly understood and communicated without uncomfortable discussions. Performance discussions can then focus on how to reach the goals.
- The incentive compensation payment schedule is tied to the calendar year
Few organizations follow a true annual cycle. Product sales may change by season, but operational performance seldom does. Salespeople are rewarded at the time of sale or collection of cash, so they're constantly focused on their commissions. Incentive programs don't have to be linked to the calendar year; in fact, disconnecting them from the annual cycle for all employees will increase focus. The BPM solution: Realize that you can link the goals associated with your performance measures to any date — or even any event — that's significant for the success of the organization.
You can improve the effectiveness of your incentive program by attacking each of the items I've listed above separately. But the true power of BPM lies in its ability to address these diverse challenges with one consistent, fully integrated approach.
David F. Giannetto is co-author of The Performance Power Grid, CEO of The Telos Group and a professor in Rutgers University's executive MBA Program. You can reach him at email@example.com.