Seeking success secrets for PFP design and implementation? Just ask management expert Lisa Anderson. “In my 20 years of experience as a practitioner, a VP of Operations and a business consultant across multiple industries and globally, I’ve gained organizational development insights for what works for pay-for-performance systems,” says Anderson, a senior supply chain and operations executive and founder and President of LMA Consulting Group, Inc. (www.lma-consultinggroup.com). She works with executive leaders and management teams to transform people and process into profit, specifically focusing on the areas of change management, process control and project management. Anderson is often a featured speaker at industry conferences, and she’s been quoted on ABC News and in Industry Week and the Los Angeles Times.
Here is Anderson’s tried-and-true advice for successful PFP design and implementation:
Keep it simple. “In my experience, pay-for-performance systems should not be complex,” Anderson stresses. “Try to keep it as simple as possible. Use a simple goal-setting and rating and ranking process. You can add complexity as you go, but keep it simple to start.”
Make it fair. “The pay-for-performance systems that are most effective are the ones that actually result in employees feeling as though they’ve been fairly paid for performance,” Anderson stresses. “There are several important steps to achieving this sense of equity.” These are:
- First, find out whether each employee is being paid within the salary range that’s appropriate in the market. If not, make the necessary adjustments as allowable within the constraints of your compensation budget.
- Provide a clear and reasonable number of goals for each employee. “A good number is three clear goals for one quarter,” Anderson notes. “When employees are given reasonable goals and clearly understand the company’s expectations of them, it ends up providing them with an amazing lift to their motivation and morale.”
- Explain how the goals fit in with the company’s vision. “Tell employees how they are contributing to the company’s value,” Anderson advises. They will be more likely to believe their performance goals are fair if they understand the importance of accomplishing them.
Have quarterly goal reviews. “Design quarterly reviews into your pay-for-performance program. This would entail managers sitting down with employees on a quarterly basis to talk about what employees have done and how everything they do on the job fits in with the company’s performance goals,” Anderson advises.
“The quarterly reviews provide a great opportunity to check to see if goals are still clear and appropriate. For example, a goal might have been set last time the manager and employee talked, to reduce inventory by a certain percentage. At the next meeting, the manager can make sure the employee is clear on the tasks he or she needs to do in order to accomplish that inventory-reduction goal,” she continues. “Managers need to empower and encourage employees to bring up concerns about priorities, and to be honest about what they feel that can and cannot accomplish. This will prevent employees from getting piled up with unclear, or too many, goals so they can’t possibly accomplish everything. You want to create an environment where employees can succeed in meeting their performance goals.”
Be flexible and adjust goals as priorities change. “Set your three goals each quarter, but be aware that as organization priorities change, employees’ goals will need to be updated as well,” Anderson says. “When new priorities arise and employee goals need be changed, make sure to explain this clearly to them, and then update all their paperwork and records associated with the pay-for-performance program. After you’ve reprioritized and talked about new goals with employees, talk about the change at the next quarterly review to assess employees’ progress and provide additional feedback as necessary.”
Communicate constantly. Ongoing two-way communication is crucial for successful pay for performance. “Continual interaction and clarity are essential,” Anderson says.
“Make expectations clear, and provide immediate corrective feedback, so they can improve their performance, and positive feedback, so they know what they’re doing right. Listen to their concerns, and provide support. Find out what interests employees and work to give them opportunities to learn new subjects that align with their career aspirations,” she advises. After all, development opportunities are, in themselves, a form of reward for outstanding performance.
Move them up and provide bonuses. “After these basics are in place, the employer will be able to pay for performance based on objective criteria—performance to the goals,” Anderson says. “There are two ways to achieve this: First, if the employee is a top performer, the manager should move the employee toward the top end of the pay scale for the role. The better the performance, the quicker the employee will move up within the range, and/or be prepared for the next-level role.
“Second, it’s ideal to have a bonus system to be able to compensate employees for performance without moving them out of their pay range, as that ends up as a lose-lose over time,” Anderson says. “If an employee is already out of his or her salary range, and is really well suited to his or her role, it doesn’t make sense to promote the employee or change his or role. You don’t want someone to go too far out of the pay range because that will create a different set of problems. That’s where a bonus can be very helpful. If you have someone who is a great performer, and you want to reward that employee for going above and beyond but you don’t want to promote them [perhaps because the person has great technical skills but would not be well suited to a supervisory role], you can come up with a separate bonus plan so you can keep them motivated and prevent them from seeking another job elsewhere.”
Get business leaders on board. Pay for performance will be much more successful with the full buy-in of your organization’s leadership, Anderson says. “When implementing pay for performance, HR/Compensation needs to partner with the business leaders of their company and ask them to follow and live by the principles of the pay-for-performance program. When business leaders understand the value of paying for performance, it becomes more than just a mechanical pay system, and you will have a much more successful rollout.”
The bottom line: “Performance goals and pay for performance should never be a surprise,” Anderson stresses. “Employees should always understand what their goals are for each quarter and why those goals are important. They should also always understand what the range is for their salary, how are they positioned today, and what they have to do to improve that position.”