5 Compensation Nightmares ……Can Your Business Avoid Them?
“I love my job so much, I would be happy to work for free”?
You must be kidding me!
While some professionals are openly focused on maximizing their earnings and others are more focused on making a difference, none would work for free. They come to work to be compensated.
In it simplest form, professionals are paid to deliver value to their company. It is simple. Yet, unnecessarily complicated and one-sided compensation models are on display today.
Let’s start with the larger publicly traded companies who make up the top tier. During the past 12 months, I have had confidential conversations with professionals at numerous Tier-1 companies. Many smaller companies regard the Tier-1’s as the big gorilla in the marketplace. After all, the big players have more resources, they generate large amounts of revenue and they are able to throw their weight around. That’s scary and intimidating to smaller businesses.
In reality, many Tier-1’s are implementing confusing, outdated, uninspiring compensation plans.
Here are three Tier 1 Company examples:
Nightmare Example 1)
I recently spoke with a revenue producer and I asked him how he earned his performance bonus. His answer was: “It is a mystery”.
He went on to explain that his performance bonus can be as high as 14% of his base salary. But, no matter what performance he delivers, it will not exceed 14%. The calculation for his individual bonus is the result of a meeting with his manager and other business unit managers who discuss and debate how much their respective revenue producers will earn in performance bonus.
This model delivers several outcomes that include:
– All revenue producers are competing with each other for the top bonus amount. Therefore, there is little to no incentive for each respective revenue producer to collaborate with other team revenue producers. You would then be helping the other guy earn the bonus that you are trying to be awarded.-
– There is no financial incentive for the revenue producer to move heaven and earth and deliver record-breaking results since the comp model is capped.
– The model is too complicated for the producer to understand how the individual’s achievements relate directly to bonus awarded. The bonus money being paid by this employer is not being used as a motivator for exceptional efforts. It is almost a wasted expenditure under the existing scenario.
Nightmare Example 2)
I was recently told about the announcement for a new type of bonus model. This “new” model would help with growth and reward the performers who contributed toward the company’s growth. Upon further review, this model might remind you of 3rd grade when everybody received an “F” on their test and then the teacher turned the highest “F” into an “A” and raised everyone’s grade from there. This was called “The Bell Curve”.
At companies like this one, the Bell Curve Compensation Performance Model looks like this:
At performance review time, very few team members receive the highest score, while very few receive the lowest score and everyone else is scored between the highest and lowest. For the employer, this model and the related bonus payout would appear to be simple and easy to budget. If you are the employer with a model like this, you regard paying out bonuses as strictly an expense line and not as a business investment for growing, motivating or retaining top talent.
– Shouldn’t bonus compensation be designed to encourage superior performance and not be considered simply as a line item expense?
– In this example, shouldn’t each employee have a clear understanding of their respective role and what each member needs to do in order to earn their bonus?
Nightmare Example 3)
This company has an employee review process with numerical grading 1 through 5 that runs on an annual basis but doesn’t actually pay the employee until the second quarter of the next year. The manager I spoke with agreed that the grading model used was ineffective. Similar to the example 2 above, managers are allotted a budget and required to grade their team from high to low. Someone has to get a high rating and someone has to get a low rating and the majority of the team will receive a rating in between the high and the low score.
– This example is another illustration of a bonus being too complex or too vague for the employee to strive to achieve it.
– This example also has a significant delay in the actual pay-out of the bonus.
– With the bonus payout occurring during the second quarter of the next year, many employers are focused on their new challenges and have forgotten what they accomplished during the previous year.
– From a financial perspective, the employee has already accrued several months of bonus in the new year without having been paid for accomplishments in the previous year. That appears to be very one-sided in favor of the employer and not the type of model that strives for the retention of critical talent.
These three examples are compensation challenges that large publicly traded companies face today. For smaller businesses, the good news is that adjusting your performance based compensation models is easier for you because you are more agile and more nimble.
However, the smaller companies are having their share of compensation nightmare challenges as well.
Nightmare Small Company Example 1)
One of the most common struggles for many smaller companies involves driving sales revenue. To address this challenge, the company attempts to hire more sales producers. Without taking stock and assessing their internal sales model, the company hires sales talent and compensates them once they deliver sales. This approach makes sense intellectually. However, in practice, no one bothered to first analyze what the current sales run-rate was (if any at all) and the development steps needed, prior to the newly hired sales talent actually making a sale. Many times, the development of a vetted sales process is needed before the new sales talent can make any sales. As a result, the newly hired sales talent leaves their job within a few months of being hired because they were unable to make any sales and they were only being paid on the revenue they delivered.
This could have been avoided by hiring the new talent to first establish a sales process and then, generate sales. Yes, the new talent should be compensated for the establishment of the sales process as part of their employment.
Nightmare Small Company Example 2)
Many small businesses are brilliant at developing their technology or the deliverable that differentiates them. It does not make them necessarily brilliant at leading or managing their critically talented team.
An example is when the senior level member is requested to define and develop a performance based bonus plan which is approved by the employer. Once the senior level over-delivers on the plan, the employer either ignores the agreement by not paying-out the bonus or the employer arbitrarily changes the bonus plan so the payout amount due is greatly reduced.
– Performance based plans are intended to focus the team member on the critical tasks that the company needs to have accomplished. The quickest way to lose a team member’s loyalty and trust is to fail to deliver a promised bonus when the task has been met.
In conclusion, today’s business world continues to change. Focused efforts toward defined tasks, delivering measurable performance and taking accountability have never been more important than they are in business today.
Aligning the business goals with performance based compensation and then rewarding for performance is critical to growth and success.
As the leader of your business, are you avoiding the pitfalls and finding ways to motivate and retain the top talent in your business?
Good hunting!
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About Boxwood Strategies
Bert Sadtler is the President of Boxwood Strategies and is a thought-leader for best practices recruiting, performance-based compensation and the shift in the changing paradigm toward acquiring critical senior level talent.
Boxwood Strategies is a management, consulting and recruiting firm located in the National Capital region. As a dedicated, consulting resource to CEO’s and hiring managers, Boxwood develops strategies for organizational growth through a focus on performance, as well as the evaluation and acquisition of critical talent.
To help companies meet numerous business challenges, Bert has co-founded the Alliance of Independent Managers, a group of diverse and accomplished senior-level professionals who are available to companies on a consultative and project basis. The focus of this group is to take “AIM” at a company’s challenges and opportunities, clearly defining it’s challenges, and deliver cost-effective solutions by using experienced, professional consultants instead of hiring full time employees. Market sectors include: SATCOM, Space, Government Contracting, Communications and Technology.
Bert can be reached at: [email protected] and at BoxwoodSearch.com