Many employers chase the Holy Grail of pay-for-performance. Whether it’s commission, piece work or production bonuses, we all want a system that compensates employees appropriately for the value they add to our business. Most of us also believe that better employees should be able to earn more than those who produce less.
Of course, that isn’t a universal truth. I’ll never forget the front page newspaper story when the Ford plant in Edison, NJ went on strike over incentive pay. The President of the local chapter of the United Auto Workers was quoted as saying “We would rather not work than agree to a system where one union member is paid more than another just because he does more work.”
Eventually he got his wish. That plant is now closed.
Most employees, however, like getting rewarded for good performance. They also like to know how much they can expect to make. The problem between the two arises when employees are dependent on incentives for a large portion of their total compensation. That’s when we run into the “over pay or over hire?” problem.
First example: A local residential carpet cleaning company advertises (as is necessary to compete in the market) “Any three rooms for $99.” Of course we all know that is a losing proposition, and that the company hopes to get additional rooms, furniture, drapes or ductwork cleaning to make up for the loss leader. The owner can’t afford to pay employees to do $99 jobs all day, so he pays them a little bit (say $10 an hour) and a substantial percentage of any add-on work. A typical employee can expect to make $17 or $18 an hour after a month or two of on the job experience.
Here is the dilemma. Employees who are accustomed to making $17 an hour won’t take a $10 job. Those who expect to make $10 are thrilled by the incentives, but as soon as they start hitting the higher hourly number, they begin voluntarily reducing their hours by calling in sick more often. Appointment commitments to customers become a nightmare, and the employee is eventually terminated. It has happened with dozens of hires.
Second example: A home care company pays site managers around $30,000 plus incentives for running a strong operation. Those incentives can raise their compensation to $50,000 or more. One of the requirements of the job is that the manager occasionally has to go into the field to provide bathing or toileting assistance to a patient when the assigned caregiver doesn’t show up. These clients are dependent on the company, and not rendering the service as promised is unacceptable.
Dilemma 2: A $30,000 manager can’t juggle the business development, management and compliance duties required to earn incentives. The $50,000 managers refuse to accept the menial (and unpleasant) tasks as part of their job.
There is nothing wrong with incentives. There is also nothing wrong with requiring employees to perform in order to earn wages commensurate with their value. The problem arises when the amount of the incentive compensation raises the job to another class of employee.As Pat Riley, the President of the Miami Heat famously said, “You can’t make a duck into an eagle.” (Even my fervent support of the San Antonio Spurs can’t make me pass up an appropriate quote.)
No amount of incentive pay will, by itself, raise an employee to another level. No amount of potential pay will make an employee accept work they see as unrewarding or beneath them. Except for salespeople, incentives should be a modest part of the compensation package.
The real solution is one that too many owners avoid. Pay employees what the job should be worth, and then hire, train and mentor people who have the necessary capabilities until they succeed. Incentives can’t replace good management, no matter how much owners may try to pretend that they will.
Amen, “pay for performance” I often cited as a panacea for improving business performance, or worst yet, a “best practice” we all should adopt. It makes me want to throw up! There is no substitute for engaged management, but I do have to admit that “pay for performance” does require management to establish operational metrics and when an owner manager puts his own money on the line, he does tend to be engaged.
Those of us aware of the 1920’s experiment at the Bell Labs Hawthorn plant should recall that the study showed us that productivity improves when management has key metrics to measure output and is engaged with the productivity. Out of this study, we learned (or should have learned) that there is no substitute for management paying attention to positive results – Results have to be measured and it takes metrics to measure results – Amen.
Proponents of the virtues of “pay for performance” often cite numerous success stories of businesses that thrive with a culture using these tools. However, consider, is there causation or a correlation between such performance. In other words, do the businesses that are performing well do so because their compensation formula is some incentive plan, or because the business is among the larger population of strong businesses that have ENGAGED management with METRICS – AMEN.
Another excellent post, John! Thank you