Insights on Excellence | "Insights on Excellence" Archive

When management and staff are not performing as they could, it's time to change the way you compensate them

by Stephen Hawley Martin
for Virginia Business
March 14, 2006

Whether you realize it or not, one thing is true in just about any business. You get what you measure and you pay for.

When people's jobs and livelihoods depend on something getting done, it almost always gets done. This means it's important to keep score in order to know precisely how the business is doing in each key area and to hand out rewards to employees when the goals they've been given are met.

In his book "Billion Dollar Turnaround: The 3M Spinoff that Became Imation," William T. Monahan explains a move he made to channel everyone's energy into getting a failing business turned around. He made sure a percentage of everyone's compensation was based on achieving company goals on operating income, cash generation and revenue.

In the arrangement he and his top managers devised, an employee could end up receiving nothing or achieve as much as 150 percent of his or her bonus percentage depending on the company's results and how much of the employee's income was at risk. Those in positions that stood to have the largest impact on outcomes had the most to gain or to lose. Bonus levels as a percentage of salary ranged from 3 percent for hourly and some administrative employees to 50 percent of the CEO's compensation, with most executives above 25 percent. This approach proved to be a very effective arrangement and it was one move that contributed greatly to the billion dollar turnaround Monahan writes about.

A peculiar situation developed at many large companies, particularly at very successful companies like 3M, during the last third of the 20th century. Monahan calls it "communistic pay practices." He says his biggest disappointment at 3M occurred when he was promoted to manager, a very important career step. He received a salary-controlled 3 percent pay raise. He asked himself, "Is this what I work 60 hours a week and travel 50 percent of my time for?"

The truth is that most employees at many big corporations receive the same pay raise each year. If the companywide increase is going to be 3 or 4 percent, you can expect almost everyone to get a raise in that range. You can also expect managers to rate almost all their employees as "satisfactory" or higher. Let's face it. These rankings simply aren't based on the actual performance or the true contribution an employee has made.

Management has itself to blame for this phenomenon. Most people look for the least painful path. Conducting business this way allows people to avoid conflict. It constitutes the easy way. All they have to do is treat everyone basically the same, keep them satisfied, or at least content and unafraid, and things will run along without disruption and uncomfortable moments.

The problem is that executives and managers are not doing their jobs when they work this way. Companies succeed because of the performance of their best people. These people need to be motivated and recognized so that they will deliver their best. They must feel valued for the contribution they make. Don't kid yourself. The most productive employees know who the unproductive people are, and when it comes to compensation they resent being treated the same. This belittles their achievements and undermines their self worth.

On the other hand, paying for performance and recognizing a job well done are actions that will drive good employees to achieve even more. In Monahan's case, he viewed this approach as an important element in his effort to establish a culture that would create and sustain success. That is why he instituted performance ranking and zero raises.

In an effort to spur all he managers to build more productive teams, Monahan raised the levels at which top performers could be paid. Every year each manager was given a set amount of salary increase and a set number of stock options. Managers then decided, with consensus reviews and rankings, the raises and options that would go to each team member.

Although there was no specified percentage goal, 15 percent of employees typically received no raise at all, and top performers often earned 6, 8 or even 10 percent raises during years when the companywide average raise was 3 percent. As part of this process, company executives received no raise at all in two years out of six.

This arrangement put managers in the position of having to explain to employees why they weren't receiving or stock options in some years. Then managers worked with these employees to achieve higher rankings the next year. Otherwise, the workers could face losing their jobs or being demoted.

The workplace phenomenon of everyone being rated "satisfactory" is, unfortunately, a product of our society. The prevailing attitude is that people should feel good about themselves. It's an attitude that says all our kids are "above average," which is, of course, impossible. This may be good for short-term self-esteem. Certainly, we all want to believe we are good and that our children are, too, but this kind of wishful thinking can be harmful. It separates us from reality and may keep us from expending the effort required to improve and reach our true potential.

The habit of accepting less than adequate performance creates trouble in any organization. Performance must be measured, and the top performers rewarded and motivated. Lesser performers must be identified and assisted. If they cannot or will not improve to an acceptable level, they should be let go.

This policy is tough for managers to follow, but it nonetheless should be part of their job. A clear requirement for performance and excellence must cascade from the shareholders to the board, to the CEO and to every level of the company. This is what sets excellent companies apart from underachievers and eventually creates long-term success.

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Stephen Hawley Martin is a former principal of The Martin Agency in Richmond and the author of more than half a dozen books including his newest, Lean Enterprise Leader: How to Get Things Done Without Doing It All Yourself. He is editor and publisher of The Oaklea Press, a book publishing business dedicated primarily to helping business executives increase productivity.