Rewarding Performance: Getting The Level Right

Most organizations pay for performance or say they do. In order to do that effectively the first step is defining performance. One of the critical decisions has to do with the level at which performance is defined, measured and rewarded… organization-wide, unit/team or individual?

Every organization is given a report card… by shareholders, investment analysts, employees and prospective investors and employees. Successful organizations generate a high return on the resources they consume, whether they are in the private sector, public sector or not-for-profit sector. This is the most widely accepted definition of effectiveness and success. In the private sector criteria such as profit, ROI, EBITDA, shareholder return, growth, share of market and other financially oriented measures dominate the definition of performance. Public and not-for-profit organizations may use quantitative measures such as expenditures vs. budget but most often define results as providing services. But no matter what definition is selected constituents will measure the organization’s performance.

When deciding how to reward performance at the organizational level there are numerous options. In for-profit organizations management may opt to budget rewards based on the level of organizational performance. If base pay increases are the medium for awards the budget for increases would be tied to results… larger budgets in good years and smaller in bad years. Another alternative is to use Incentive plans that create an award fund that is a percentage of profits over and above an established threshold, with profits below the threshold being reserved for shareholders, to pay them a return on their investment. Management may believe that only executives and managers should share in the fund, based on their more direct and significant impact on organizational results. Or the philosophy might be that all employees contributed in their own way and therefore should share in the spoils. No matter what eligibility criteria are allocation decisions must be made.

Cash performance sharing incentive plans have a long history. Roman Legions had a plan that all should share in the spoils of conquest, with “managers” (Centurions) receiving five times the loot received by the “employees” (Legionnaires). Profit sharing plans, both cash and deferred, often calculate individual awards using the same dollar amounts or the same percentage of current pay for all employees. In some cases the targeted award level varies by organizational level, based on the assumption that those in more responsible positions contribute more than those with lesser responsibilities. There may also be differences in the type of awards. Managers may receive stock or stock options while others may receive cash.

Some organizations insert another level for determining allocation. Divisions, business units, departments or teams may have their performance measured, with the size of the fund allocated to each based on their performance. This approach considers both organizational and unit performance in allocating awards. The figure below outlines the alternative methods of allocating reward funds.

Another decision must be made relative to allocation. Should employees who contribute more receive larger awards than those contributing less? If the organization uses a merit pay system this is the intent, although merit pay results in larger or smaller base pay increases, rather than cash awards. If incentive plans are used the share of the available fund, whether determined at the organization-wide or unit level, is allocated based on relative individual performance. One of the differences between merit pay and incentive plans is often that merit pay is based on how the individual performs a job, while incentive awards are generally for meeting objectives.

When teams are used it poses another question. If performance can only be accurately measured at the team level should any attempt be made to use individual performance as a determinant of awards? A research team may include people from different disciplines, making it difficult to differentiate contribution, especially if no one can produce the desired results without the assistance from the others. A team creating a new product using concurrent design may have people representing Engineering, Finance, Production and Marketing, with all contributing different perspectives. This also make it difficult to compare individual contributions. When culturally diverse teams exist the acceptance of the allocation method may differ across cultural orientations. In individualistic cultures egalitarian allocation may be viewed as inappropriate, while in collectivist cultures differentiating between individuals may be thought to be wrong-headed.

It is critical to address these philosophical issues before deciding how to define, measure and reward performance. An organization can select the organizational or unit or individual level. Alternatively it can deem it appropriate to define performance at the organizational and the unit and the individual level and to make separate reward allocation decisions at each. It depends on the culture… of the organization and the workforce. Getting the level(s) right is critical to the effectiveness of a strategy governing how performance is defined, measured and rewarded.

Advertisements

General, Time-Based Pay Increases…A Waste Of Scarce Resources

The economic crisis that began in 2007 had a profound impact on the rate at which average pay levels increased in the U.S. labor market. For several years market averages moved little, if at all, and many organizations froze and even reduced base pay levels to offset the drop in revenues. The organizations that best managed the economic realities were those who used a strategy that selectively adjusted employee pay rates based on relative contribution and that considered how well individuals were already paid. Those using merit guide-charts that based pay adjustments on both performance ratings and position of the pay rate in the range allocated the limited budgets optimally. Those that gave automatic, time-based pay increases not only did a poor job of allocating budgets but also exacerbated out of line pay rates.

When allocating a pay increase budget the philosophy should be to give the largest increases to those performing at a high level and whose current pay is low relative to the market and their contributions… these are the people competitors would love to have. The smallest (including zero) increases should go to those paid above market and/or above the level warranted by their contributions… these are the people who could not replicate their current pay elsewhere. No system appeals to everyone. Lawler once said “whatever you do 15% of the employees will hate it… just make sure it is the right 15%.” So the system used should motivate and satisfy the employees the organization wants to keep and that it needs the most.

Some public sector entities still use automatic, time-based step increase programs. These systems are most common in collective bargaining units. If there is little or no opportunity to vary performance in a role this approach is less disastrous. But “pass-fail” jobs have become rare. So why do these systems continue? I worked with a large municipal water utility that used steps… until a Board member challenged the system during the economic crisis. He had been accosted by a neighbor, who wanted to know why the payroll of the utility was increasing each year when there supposedly was a hiring freeze and the labor market rates were not increasing. His only answer was that the utility had promised increases would occur every year. The neighbor pointed out that was contrary to everything known about motivation and perhaps it was a time for the utility employees to be treated more like the rate payers were being treated in their organizations. The Board member made it clear to the utility’s management that the “pay for aging” system had come to an end.

During the crisis the President told the public that U.S. Federal employee pay had been frozen for two years. That sounded good but it was not true. The pay structure had been frozen but employees still were getting their 5% step increases… irrespective of their performance or how well they were already paid. While consulting with several federal contractors during that time I was aghast that their pay had really been frozen for two years by the Dept. of Energy. This across the board approach disregarded the competitiveness of contractor pay levels and increased the difficulty of convincing newer employees paid low in their range that they would be rewarded for their performance. Since most were highly educated in STEM fields this damaged recruiting and retention efforts during a talent shortage. But the government personnel responsible for contract oversight were still receiving automatic increases.

For employees learning the skills and acquiring the knowledge required by their jobs an automatic progression can be appropriate. It is difficult to differentiate pay actions based on performance when the employees are not competent to perform. Someone starting as an apprentice in a skilled trade is mixing training with on the job application and being assigned work consistent with his or her qualifications. Their pay grows along with their mastery. This makes sense but this is a very small portion of the employed.

The public sector has been moving from step rate systems to merit pay systems. When I designed a survey of water utility compensation some fifteen years ago over 2/3 of the utilities reporting used steps. Today less than 1/3 do for non-union employees. At least half of the federal employees are in agencies that have abandoned the GS system and its automatic steps. They did so because they were unable to attract and retain high performers and because there was no control over the expenditure on pay adjustments. So the trend is clear.

I have been told by executive management in some organizations that their employees prefer the step system. But if the context within which the organization must operate makes automatic escalation of payroll costs untenable it seems management should explain to the workforce that this cannot continue if the organization is to survive and/or convince investors or the public that their money is being spent appropriately. Time for general increases and automatic time-based progression to become a lot rarer.

Mission-Centered Workforce Management Strategy

miss

Every organization exists for a purpose. The purpose is derived from a vision… something the organization strives to bring to fruition. Defining a mission aimed at realizing the vision provides a guidance system for its functioning. An example of a vision for a water utility is “every citizen with safe, reliable and affordable water.”The mission would be to do what is required to realize that end state. The mission is critical in strategy formulation. In some cases the mission is relegated to a manual or even a wallet card and then virtually forgotten. But if executive management is not navigating to the appropriate “magnetic north” the organizational and workforce management strategies may fail in mission fulfilment. It is also imperative for all employees to understand and accept the mission if their efforts are to be aligned and appropriately focused. George Odiorne once advised “if your people are headed in the wrong direction don’t motivate them.”

The workforce management strategy must be aligned with the organizational strategy, which in turn must be consistent with the mission. The mission is the basis upon which organizational objectives should be formulated and it should help establish the relative priorities associated with the objectives. Using a water utility as an example I asked graduate students in a DePaul U class what the performance measures should be for the organization. Since utilities are for the most part municipal or county owned it is clear that profit was not in the picture. So with a little direction they settled on operating costs vs. the established budget. This certainly deserves consideration since there is accountability to the citizens who fund the organization through their taxes and/or utility bills. But when one narrows possible objectives down to one the result must be safety. Make sure they reliably deliver water that is safe.

The recent Flint, Michigan disaster resulting from the flawed operations of the water utility is not unique… there have been instances of public welfare being harmed by inappropriate management of utilities. There are very restrictive regulations mandating who must staff a water treatment plant. A qualified Class D (or 4) Operator must be on duty at all times, to ensure actions taken are monitored by a highly qualified person. But if all aspects of a treatment plant’s operations are not under the control of appropriately qualified people disaster looms. And the same holds true for the field crews who build and maintain the water distribution system. If management were to focus on costs in order to meet the operating budget in a manner that resulted in shortcuts the risk of mission failure skyrockets. Sacrificing quality to meet cost objectives is the “third rail”in a utility.

Every organization must balance its focus on the objectives it strives to meet. The Balanced Scorecard approach to managing organizational performance makes it clear that tradeoffs between operational, financial, customer and workforce results must be decided on. Reducing expenditures on training that can compromise competence of the workforce may result in a lower payroll but may endanger the organization’s ability to meet its other objectives. The financial condition of Flint pressured decision makers into allowing operations to proceed even though all the pieces were not in place to maintain public safety. Here public safety was not a desirable objective… it was a mandatory requirement. And its nature precluded tradeoffs.

If the staffing, development, performance management and rewards management strategies of an organization do not result in adherence to mandatory requirements they must be changed. It may be appropriate for a for-profit private sector organization to cut corners in one area in order to meet other objectives but it is incumbent on management to ensure they understand the risks and find them acceptable. The ill-conceived incentive plans used by many major financial institutions contributed to the recent financial crisis. “What you measure and reward you will surely get more of” is a sound principle of motivation. Paying for performance is a sound strategy if performance is appropriately defined and measured. To repeat Odiorne’s advice “if your people are headed in the wrong direction, don’t motivate them.” In the financial industry example the primary motivation was money. In the Flint example the motivation was to continue operations even though the resources were not in available to adequately manage risk. These are disastrous failures of management.

The book “A Short Introduction to Strategic Human Resource Management”(Boudreau & Cascio) focuses on the risk management responsibility of the Human Resources function. But risk management is everyone’s responsibility. If a single water treatment plant operator is not competent to deal with issues in the plant the potential risk to the public is unacceptable. For that reason the strategies used to staff and operate the facility must result in adherence to the primary mission… protect the well-being of the public. Although the results of failure may be less dramatic for a private sector organization investors will still find that inadequate risk management is unacceptable, since it endangers their financial well-being.  Every organization must consistently assess its workforce management strategies to ensure they produce a workforce that is qualified and motivated to do what is necessary for mission fulfillment.

THE IMPORTANCE OF CULTURE IN MANAGING A WORKFORCE, WHEREVER YOU ARE

Series about the impact of national/ethnic culture carried the message that organizations must understand the impact of the values and beliefs held by employees in order to manage them effectively.

While recently teaching my Global Workforce Management course at DePaul University I found it necessary to stress that an organization does not have to employ people outside the headquarters country in order to have a culturally diverse workforce. The students in the class came from several countries and readily admitted they faced cultural adjustment working for a U.S. entity, especially when the employer adopted an ethnocentric view resulting in standardized workforce management policies and systems.

It is true that setting up operations in other countries where locals might have very different cultural orientations raises cross-cultural issues in a more pronounced manner. And the U.S. has been called a “melting pot,” due to the diversity in those settling the country. But increasingly the homogeneity that would result from complete melting has not been realized and there is considerable cultural diversity in the country’s working population.

Fons Trompenaars has suggested success comes from recognizing the three Rs of cross cultural management:

  • Recognizing differences when they exist.
  • Respecting people’s rights to hold different beliefs.
  • Reconciling the issues related to those differences.

The third is the most challenging. Some organizations have strong cultures that result in treating everyone in a manner consistent with their established policies. Accommodating cultural differences is something they struggle to do. Work schedules may result in the need to work on the Sabbath recognized by employees, which might be Friday, Saturday or Sunday. A strong “pay for individual performance” policy may be viewed as inappropriate by employees whose beliefs about just distribution of budgets might call for similar rewards for all. Many more challenges occur, as cited in prior posts and in the book “Rewarding Performance Globally.”

Rewarding Performance Globally: A Cross-cultural Approach

book-iimage

Organizations operating globally must manage diverse workforces. Even if they do not take operations “there” talent will come “here.” Managing cultural differences presents challenges that are daunting. Reconciling policies and practices with diverse beliefs, values and priorities is a competence that must be developed.

Cultural orientation at the individual level acts as a filter that determines how individuals view the world. What one learned from parents, peers and societal influences becomes deeply imbedded in their psyche. Assuming everyone will accept being treated the same will result in disappointment on the part of those managing an organization.

The book “Rewarding Performance Globally” provides insights into the dimensions that form cultural perspectives. It explores the impact of cultural diversity on how employees will be predisposed to react to strategies for defining, measuring, managing and rewarding performance. The dimensions of culture are defined and their implications for global managers presented.

The cultural dimensions are based on models resulting from cultural anthropology and confirmed by extensive research. Prior publications authored by authors Trompenaars and Greene have discussed the theory and empirical research underlying cultural diversity. “Rewarding Performance Globally” uses a case to illustrate the practical implications.

Future posts will highlight the implications of several of the cultural dimensions, focusing on performance and rewards management.

The dimensions to be discussed include:

  • Individualistic vs. Collectivist perspective
  • Universalistic vs. Particularistic perspective
  • Hierarchical vs. Egalitarian perspective
  • Internal vs. External Control perspective
  • High context vs. Low context perspective
  • Long-term vs. Short-term perspective
  • Past, Present or Future perspective

It is necessary that those dealing with cultural differences do not fall into the trap of stereotyping. Some Frenchman will behave more like some Germans than many Germans. The other danger is labeling one pole of a dimension’s continuum as “good” and the other “bad.” They are just different and each has its own logic and promotes a different perspective. But people tend to see their own beliefs as “good” and often demonize the beliefs of those having very different perspectives. The fact that cultural orientation is so deeply imbedded makes it difficult to people to know where others are coming from when there are disagreements. An employee with a collectivist perspective may expect that a team incentive award will be shared in an egalitarian manner (it took all of our efforts to succeed) while another with an individualistic perspective believes individual contributions should be measured and rewarded in proportion to their value. When the manager of the team finds that not everyone feels whatever approach is adopted is appropriate the rubber meets the road. And there seems to be no apparent resolution.

National/ethnic differences have been measured by research studies and tendencies for different groups to believe differently identified. But it has also been found that variances within cultures can be as great as those across cultures. Diversity can also be caused by occupational and age differences, making it even more difficult to anticipate what the cultural profile of any individual might be. But familiarity with the research identifying tendencies can greatly enhance the manager’s chances of anticipating what they are and successfully navigating the whitewater that cross-cultural management is.

Same Strategies For All Employees?

How effectively and appropriately an organization defines, measures, manages and rewards performance will have a profound impact on workforce effectiveness. Whether an organization uses the same strategy and programs for all employees is a critical question.

Employees playing different roles, trained in different occupations and socialized in different cultures present different needs, wants and expectations. They all want to be treated equitably, competitively and appropriately. And despite calls for equal treatment when rewards are at stake it is prudent for organizations to decide how employees are evaluated and rewarded based on the differences in what they do and what they contribute.

The bookRewarding Performance: Guiding Principles; Custom Strategieswas written based on two premises:

  1. that there are fundamental principles underlying sound performance and rewards management
  2. that occupational/role differences should be considered when deciding how to reward performance.

Executives, sales personnel, professionals, support personnel and culturally diverse global workforces may all call for different strategies. What works is what fits. Prior posts have summarized some of the differences between specific types of employees. This post examines how organizations should face the consistency vs. best fit dilemma.

Some organizations reward employees using a single system. Those having a single base pay structure and one set of policies regulating how individual pay rates are administered within the pay ranges have emphasized consistency. If they do not use variable pay programs of any type and if they offer the same benefits to all employees they represent the poster child for the “one system for all” approach. At the other extreme are organizations that have multiple pay structures, numerous short-term variable pay plans and long-term incentives using equity. Neither group is right or wrong. As long as their strategies and systems fit their mission, their culture, their internal and external realities and their objectives it is hard to question their approach.

Many public sector entities fall in the “consistency” category, although to varying degrees. On the one hand they might progress base pay automatically, tied to time in grade. But this approach has been abandoned by many since it is the most expensive, least motivational and unappealing to top performers (an example is public utilities: a decade ago over two-thirds used step-rate progression; today less than a third do). Yet the migration to merit (performance-based) pay has in many cases proven difficult given the cultures that have prevailed historically and the resistance of unions. Adopting incentive plans in the public sector is difficult, due to the fear that public reaction would be negative. However, one sage individual in a government position providing oversight of the national research labs expressed his belief that the taxpayers did not want cheap science at the expense of the highest quality of science. This author worked with that individual to rewrite a DOE Order to allow contractors managing the labs to use variable compensation as long as several criteria were met. The positive reaction encouraged private sector organizations to bid on management contracts since high levels of performance could provide appropriate returns.

The private sector has an enormous range of strategies, due to the differences in the contexts faced by organizations. Start-ups and emerging organizations often lack the stable cash flow to commit to generous base pay and benefits programs, but they may be able to attract and retain talent using equity programs for critical talent. Organizations that compete based on price may be forced to carefully control fixed costs, including base pay and benefits. Yet they may identify critical roles (e.g., IT and Logistics in Walmart) and reward the people they need to be efficient most generously. Industry leaders can trade on their brand as prime employers and use a variety of strategies that are customized to fit different segments of employees.

Deciding an organization’s place on the consistency – local best fit scale is challenging. Often planners start by assuming consistency and then making exceptions where required. But this might cause them to choose administrative ease over localized fit. Rather, they could evaluate each occupational/role segment of the workforce and decide what would be the best fit when performance is defined, measured, managed and rewarded. Then similar strategies can be combined to produce an administratively manageable array of programs. As long as each local strategy is consistent with the culture and the principles embraced globally by the organization the reasons for doing things differently for different employees can be explained and defended from a business standpoint.

Risk Management: Critical Component Of Human Resource Management

risk

 

Effectively managing risk is a critical part of management. Recent disastrous events experienced by private and public sector organizations illustrates the impact unexpected occurrences caused by workforce failures can have on populations, the environment and the economy. Water utilities make people sick; nuclear power plants threaten entire communities; manufacturers produce defective products that can harm users… all impact operational effectiveness and create potential legal liabilities. And organizations that expose themselves to legal liability can destroy shareholder value and even fail to survive.

The importance of managing risk must be an organizational priority. Employees must be competent and must focus attention and resources on strategies that minimize risks. Risk management includes evaluating what can happen, what is happening and what has happened. Environmental scanning, scenario-based planning and data analysis are all tools for anticipating future events. Policies, procedures and protocols can guide actions when event are occurring. And “after action reviews” can provide information that can inform management as to what has worked and what has not worked in the past.

But when organizations think of risk management they often limit their perspective to operational issues, forgetting that operational failures are most often caused by people making poor decisions or decisions they are not qualified to make. Poor selection and training can result in the organization being in the hands of people not equipped to be effective. And as the technology used and the operational demands change a failure to invest in retraining can result in a workforce that does not fit the current context.

Workforce planning has received far less attention by those responsible for risk management than it should in many organizations. This is generally due to a lack of recognizing that not doing workforce planning can create exposure to liabilities and operational crises (see earlier posts).  If events truly are unpredictable it is difficult to plan effectively for them. But the use of scenario-based planning makes it possible to formulate visions of possible futures that create pessimistic, optimistic and most likely scenarios.  Strategies for coping with multiple futures enable an organization to move to a higher state of readiness to cope with the future that manifests.

Workforce planning is also an effective tool for reducing the risks that an organization will not have the people with the required knowledge, skills and abilities necessary for effective functioning. There are those cynical about the value of planning (they love quotes like “rain dancing has no impact on the rainfall – it only makes the dancers feel better”). But justifying the investment of resources in workforce planning is somewhat like investing in education… you might think it expensive but try costing out the alternatives. The component steps in the workforce planning process illustrated are:

  1. Identify critical roles/occupations
  2. Determine the adequacy of the current workforce
  3. Identify gaps that exist today
  4. Project demand in 1, 2 and 5 years
  5. Identify gaps that will exist in the future if no action is taken
  6. Define sources of additional people and ways in which people will be lost
  7. Develop a strategy to close gaps and ensure future workforce viability.

Another concern is that today’s requirements may become less important in the future, replaced by new priorities. This mandates that planning be continuous and that staffing, development, performance management and rewards management strategies are continually updated to keep them aligned with current realities.

The Human Resource function must develop workforce management strategies and programs that get the right people (competent and committed) and develop them to ensure they are able to do what is needed. HR must develop strategies that effectively define, measure and reward performance in a manner that ensures employees focus on contributing to organizational effectiveness. Failure to recognize HR’s critical responsibility for risk management makes their world riskier.