Most companies, in my opinion, overpay for underperformance. It’s not because their people aren’t talented; it’s because those employees under-deliver.
Let me clarify that I’m not talking about situations where employees are overworked. I’m talking about the issue faced when employers fail to hire the right talent, develop appropriate metrics to measure performance and reward employees accordingly.
When tackling this challenge, CEOs are confronted by two questions: Should we just pay really well and accept nothing less than superior performance? Or should we pay competitively and reward deliverables along the way based on operating performance?
Like any business, the sheer truth is we have to buy low and sell high. We have to negotiate the best possible rates, for the best possible talent. But I believe that good employees should never have to ask for a raise. So how do we track performance and reward employees appropriately?
I do not have an MBA. In my 19 years as a CEO and through countless shared experiences with other thought leaders, I have learned the hard way that variable compensation and operational performance programs could be a turn off for the wrong type of person and a wonderful motivator for another. Personally, I view it as opportunity rather than something that’s framed up as a penalty; some could perceive this as jumping through a hoop to get their paycheck. If done the right way, it becomes about growth and betterment.
I have people on my team that are not motivated by money or deliverables at all. They are motivated by performance, opportunity and the excitement of creating something from nothing. For those employees, a base pay that is competitive may suffice. They will come to the office, work hard no matter what, and be happy. So, do you offer variable pay to this employee? Consider the following: Perhaps there are a few additional (optional or critical) tasks within a role that, if completed, would make everyone’s life so much easier. If that employee can deliver on those, without being babysat, then you can apply added financial incentive if they accomplish these bonus items.
But, because of the nature of the tasks, if they stall out and cannot complete them, the company will not go under, and the employee will not feel devalued. This allows for paying what the market suggests, but also giving team members a way to excel.
Conversely, some are very driven to hit goals based on incentives. We know that sales, for instance, is a numbers game. Some degree of variable compensation is a given. For people that are motivated by dollars, we seem to think right now that variable pay of around 10%-20% seems motivational for them. But not all sales people are commission-minded closers, so in my experience, a blended approach is most common.
Now you have to be very careful. Tracking operating performance can get very complicated. If every single person on your team has an operating performance with 17 different metrics, somebody has to track that. That is a daunting task. It comes down to determining two things: the measurement of the information itself and the frequency of sampling.
If you’ve had a chance to read “Traction” by Gino Wickman, the concept of the Entrepreneurial Operating System suggests that there are many different ways to track performance. Personally, I want to keep it simple. I want to be able to look at it and say “done” or “not done.” So, if I can’t glance at the info or the data and gather whether it’s “done/not done,” I haven’t developed the proper system to measure operating performance.
It can be as simple as one-on-one meetings with our direct reports where we discuss whether goals were achieved. Other options that are easier and more automated could be using a simple checklist application like Wunderlist or a shared Google spreadsheet where data is collected. Another great resource (go buy it now) is the book “The Motivation Toolkit: How to Align Your Employees’ Interests with Your Own” by David Kreps. It’s full of concepts, the pros and cons of each, and non-biased case studies to support them all.
More and more, especially with the millennial generation, variable pay options are a checkbox on the “Do You Have a Great Job?” list. From what I have seen, productivity and quality of work increase when pay is variable. And operating performance numbers are mostly born of the idea that everybody wants to grow. Everyone wants to know that they have an opportunity for growth. It’s not just about the job.
Matt Radicelli is the founder and CEO of Rock The House Entertainment Group. This article was originally written for Crain’s Cleveland Business.