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Pay for Performance

Hourly wage rates are unfair to productive workers. Why? The faster they accomplish a specific task, the less they get paid for that task.

Assume you pay a clerk $6.00 per hour and that clerk’s assignment is to sweep a certain floor. If it takes the clerk one hour to complete the sweeping, he’s earned $6.00.   But, if he gets going with great enthusiasm and can do the same job equally as well in 30 minutes, now he earns only $3.00 for the exact same task! For bringing extra effort and resourcefulness to his sweeping, he gets docked 50% of his pay! Surely there is something drastically wrong with the hourly pay system!

If you agree that hourly wages are a disincentive for highly motivated and efficient employees, what’s better? Simple …. it’s pay for performance.

Back in the good ‘ol days before hourly wages, almost all workers were paid for performance. The classic example is piece work compensation. If you produced one item, you got paid for one item. If you produced ten items, you were paid for ten. If you skated and didn’t produce anything, you didn’t get paid anything. Under this system, you can bet that there weren’t many people sitting around not producing, just waiting for a paycheck.

About now you are probably thinking that quantity-based pay can also make for some shoddy output. Agreed, since haste can make waste, quality standards came into play. With quality standards, a worker not only had to produce, they had to produce up to a certain minimum quality level.

By now you may be thinking let’s scrap our hourly wage system, but obviously, we would run into huge legal problems if WE tried to eliminate hourly wages. We can, however, use minimal hourly rates and salaries supplemented with thoughtful pay for performance bonuses.

Before you jump into any pay-for-performance bonus program, however, consider:

You will get exactly what you pay for!

And often, what we pay for produces problems. For instance, if your bonus structure is based solely upon individual effort, teamwork may be hampered. An employee that is only concerned with their own individual bonus goals can put incredible pressure on other employees and wreak havoc on a former reasonably efficient company.

Bonus programs designed without full thought to the consequences can work to a company’s detriment. Consider a common practice of paying sales commissions based upon volume.   With this type of program, most typical sales personnel will develop low-margin, high-volume customers resulting in lower profits than before the commission program! This is obviously not management’s intent.

There are no magic formulas for compensation, however, use these guidelines to help design programs that optimize profitability, efficiency and teamwork:

1) Determine company goals. Each individual’s compensation plan should be designed to drive the company towards its stated goals. Don’t get the cart before the horse by starting bonus programs before determining what the company truly needs.

2) Determine measurable activities and tasks performed that are most critical for moving the company towards its stated goals.  Measurable and critical are the operative words here.   These tasks become the basis of performance compensation.

3) Use team as well as individual benchmarks. Teamwork tends to produce superior results compared with individual effort.

4) Check inputs each individual or team would need to complete those tasks.  Are there any prerequisites that may not be within the individual or team’s control? If so, the compensation plan may not be achievable despite best efforts and therefore may not be viable.

5) Determine impact to the company if the individual or team excels at the compensated task. Could the rest of the company still operate efficiently and keep up with the volume? Could too much of a good thing hurt the company? If so, design the bonus program with minimum and maximum guidelines.

For instance, a company with an annual goal of 10% wholesale gross margin growth might consider the following performance pay programs:

Sales People – Pay for gross margin developed on new accounts together with a stipulation for no decrease in existing customer margins. (If you don’t put in the criteria for keeping existing accounts stable, the sales person would be financially better off to concentrate entirely on new accounts and ignore faithful older customers.)

Credit Department – Time turnaround on new account credit determination and set-up.

Customer Service and Drivers – Pay a referral fee for identifying potential customers. Half the fee could be paid when the customer places their first order and then the other half after the account reaches their one year mark.

For c-stores, the most common bonus program is for store managers where they are paid a bonus based upon direct operating profits. Direct profits are defined as those over which the manager has complete control. It takes more than managers, however, to run a successful store. How about clerks?

Clerks can receive bonuses for increasing total gross margin or average gross margin per customer on their shift.

Be especially careful to set achievable targets and design programs that stimulate internal cooperation, not competition among employees. For instance, if you have a customer service bonus that can only go to the top customer service rep for the month, all other reps who worked hard but did not win the bonus will be demoralized. (The same holds true for “Employee of the Month” programs.) In effect, you pump up one person at the expense of the rest of the team.

Instead, design programs where everyone gets compensated for desired results. Be alert for compensation opportunities to reward quality. Getting the job done right the first time can produce enormous cost-savings for petroleum companies. You can structure pay-for-performance programs based on completeness of orders, correct invoices, perfect store or driver paperwork, lack of spills or accidents, etc.

Any time you embark on a new pay-for-performance program, make it clear to your employees that this is a “try-it-and-see” program. If you get unexpected negative results, there won’t be any hurt feelings or disappointment if you need to cancel or modify the program. It’s O.K. to say this is something new we’re trying, but with no promises for an ongoing program. Ideally, however, you try for that perfect program that does meet your needs and can go on indefinitely with minimal tweaking.

Pay for performance is a powerful productivity tool. Used carefully and thoughtfully, pay-for-performance programs can accelerate positive change in any size company. If your company hasn’t started a program yet, there is no better time than the present.

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