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Pay, Productivity, Performance And Profit

November 27, 2009

It’s a situation that we have all experienced. You walk into a store with the intention of making a purchase. You look for some assistance from a sales person. There are a few people around, but its hard to tell if they are employees or customers. Frustrated and impatient you ask for help and finally someone strolls over with all the enthusiasm of a hibernating bear.

You walk into a different store, perhaps a car dealership or a clothing store. As you casually stroll in the door, what appeared to be a small huddle of employees immediately disperses and one of the group descends upon you like a hungry hawk leaving their perch to pounce upon the innocent prey. Your presence is so tantalizing that the hawks have been even known to fight over whose customer you were.

What’s different about these two situations? Is it the type of business? Most likely its a structural reason, the compensation system. One group of employees is paid a straight wage and the other is paid a commission based on what they individually sell. Guess which is which?

What’s the same about these two situations? Well there are probably lots of things that are similar but the most important observation is that while both situations are common, neither makes sense for most businesses.

Compare for a moment an accounting system and a compensation system. An important element in the design of an accounting system is to structure the system the way in which you want to view the business. For example, you group sales categories that are effected by common factors and expense items that have common control. In this manner you have some accountability for the various elements of the business.

In designing a compensation system the same principals should be followed. Design your compensation system so that it impacts the way your employees view their work. If the employees have no discretionary impact on the operations of the business, pay them a straight wage. If you want some individuals to prosper while others falter, construct an individual commission system.

If the performance of all your employees has a significant impact on the performance of your business, construct a compensation program in which your employees will be impacted by the overall results of the business . Whether it be in fashion or at a factory, in service or in sales, company wide incentive programs make sense.
I am not talking about a “drippings” system with a year end profit sharing payment. That is appreciated but doesn’t really impact daily actions during the other 364 days of the year. A meaningful program calls daily attention to the factors that impact the bottom line.

Employees need to know the factors within their control that influence the operating results of the business. Regardless of the level of responsibility of the position, if a position is important enough to exist, performance in that position will have some impact on the company. A lot of small contributions can make a big difference. If you are certain that the level of performance can’t impact the company, eliminate the position.

It maybe difficult to envision the development of a company wide incentive system. At first it may appear too complicated. But there is an important principal involved, if the employee is significant to the result, the result has to be made significant to the employee. Once accepted, the principal can be incorporated in many customized, common sense formats.

If your employees aren’t regularly called upon to exercise human judgment to influence the operating results of the business, you need robots not employees. If you need robots get them, but don’t treat employees as if they were robots.

It seems logical to some, and perhaps rightfully so, that when you hire somebody to do a job and you pay them a fair wage, they should do the best that they can. It seems logical enough but that’s just not the way things work. Incentives make our system work. Properly structured they can get everybody focusing their attention on the relevant issues and pulling the oars in the same direction. It brings out the best in all of us.

Concerns are often raised that group incentives penalize the best and benefit the laggards. Properly designed, group incentives should support the high achievers, provide an opportunity for others to raise their performance and expose those that have no place in your business. Because it’s your business, give your employees the incentives that will get all the oars pulling in the right direction.

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