PBSs should avoid any linkage to share price movements
No bonus should be pegged to the stock market price as the stock market price does not reflect the contribution staff, management and CEO has made.
Only a fool believes that the current share price reflects the long term value of an organisation. Just because a buyer, often ill informed, wants to pay a certain sum for a ‘packet’ of shares does not mean the total shareholding is worth that amount.
Providing share options is also giving away too much of shareholder’s wealth in a often disguised way.
PBSs should be linked to a balanced performance
The balanced scorecard has offered another avenue to pay performance. PBSs using a balanced scorecard are often flawed on a number of counts:
- The balanced scorecard is often based on only four perspectives ignoring the important ‘environment and community’ and ‘staff satisfaction’ perspectives
- the measures chosen are open to debate and manipulation
- there is seldom a linkage to progress in the organisation’s critical success factors
- weighting of measures leads to crazy performance agreements such as Exhibit3.
Exhibit 3: performance related pay systems that do not work
An alternative would be to link the PBS to the organisation’s critical success factors. See an example of an airline PBS in Exhibit 4.
Exhibit 4: How the performance related bonus would differ across teams (airline)
In this example all teams have the same weighting for the financial results. Some readers will feel this is too low. However when you research more on the balanced scorecard philosophy you will understand that the greatest impact to the bottom line, over the medium and long term, will be in the organisation’s critical success factors.
The operational team, at one of the airports, has a major focus on timely arrival and departure of planes. You could argue that this should have a higher weighting such as 30%. However, this team does impact in many other CSFs. This team clearly impacts the timely maintenance of planes by making them available on time, impacts the satisfaction of our first class, business class and gold card holders passengers. The public’s perception of the airline is reflected in the interaction between staff and the public along with press releases and the timeliness of planes.
Ensuring that staff are listened to, are engaged successfully, are constantly striving to do things better (Toyota’s “Kaizen”) is reflected in the weighting of “stay say strive” and “Encouraging innovation that matters”. There is no weighting for ‘accurate timely information which helps decisions’ because other teams such as IT and accounting are more responsible for this and I want to avoid using precise percentages such as 7% or 8% which tends to give the impression that a performance pay scheme can be a scientific based instrument.
The public relations team has a major focus of creating positive spin to the public and to the staff. All great leaders focus in this area. You need not look past Richard Branson in this respect. The weights for the PR team will focus them in the key areas that they can contribute. By having innovation success stories and recognition celebrations staff will want to focus in this important area of constant improvement, which has been demonstrated so well in Toyota over the last couple of decades.
The maintenance and accounting teams focus is more narrowed. The accounting team has a higher weighting on “Stay say strive” and “Encouraging innovation that matters” to help focus their attention in these important areas. This will improve performance and benefit all the other teams they impact through their work.
PBSs should avoid having ‘deferral schemes’ for unrealised gains
All unrealised gains are just that. In many cases they are a mirage. Whilst we need to reward those who got in first to a climbing stock we need to recognise that the extent of the gain is largely due to a bounce back.
Already some banks have adopted a deferral mechanism on unrealised gains. Whilst this is understandable we need to consider likely the impacts:
- We do not want all stocks sold and bought back the next day as a window dressing exercise that dealers/brokers could easily arrange with each other.
- The financial sector is driven by individuals who worship the monetary unit, rather than any other more benevolent force. This is a fact of life. A deferral system will be very difficult for them to accept.
- Staff will worry about their share of the pool when they leave, the last thing you want is a team leaving so they can cash up their deferral pool while it is doing well.
- Dead wood may wish to hang around for future pay days out of their deferred bonus scheme
It is my belief that while some sectors may be able to successfully establish a deferral PBS the financial sector is fraught with difficulties. I believe it would be better to focus on the other foundations stones especially the removal of super profits.
All PBSs should be tested to minimise risk of being ‘gamed’ by participants in the scheme
All schemes, where money is at stake, will be gamed. Staff will find out ways to maximise the payment by undertaking actions that will often not be in the general interest of the organisation.
The testing of the new scheme should include the following:
- Rework bonuses paid to about five individuals over the last five years to see what would have been paid under the new scheme and compare against actual payments made.
- Consult with some clever staff and ask them ‘What actions would you undertake if this scheme was running?’
- Discuss with your peers in other companies better practices that work – this will help move the industry standard, at the same time as avoiding implementing a scheme that failed elsewhere.
PBSs should not be linked KPIs
KPIs are a special performance tool, it is imperative that these are not included in any performance related pay discussions. KPIs are too important be gamed by individuals and teams to maximise bonuses. Whilst KPIs will show; 24/7, daily or weekly how teams are performing it is essential to leave the KPIs uncorrupted by performance related pay.
In my book ‘Key Performance Indicators –developing, implementing and using winning KPIs’ I pointed out that not all measures were KPIs. In fact performance measures can neatly be broken into four types.
|The four types of performance measures||Frequency of measurement|
|key result indicators (KRIs) – give an overview on the organisation’s past performance and are ideal for the Board as they communicate how management have done in a critical success factor or balanced scorecard perspective||Monthly/quarterly|
|result indicators (RIs) give a summary on a specific area and they tell staff what they have done e.g., yesterday sales||All time frames|
|performance indicators (PIs) are targeted measures that tell staff and management what to do e.g., # of sales visits organised with key customers next week/fortnight||All time frames|
|key performance indicators (KPIs) tell staff and management what to do to increase performance dramatically e.g., planes that are currently over two hours late||24/7, daily, weekly|
Certainly most teams will have some useful monthly summary measures which I call result indicators which will help teams track performance and be the basis any performance bonus scheme.
Communicating with staff using PR experts
All changes to such a fundamental issue as performance related pay needs to be sold through the emotional drivers of the audience. With a PBS this will require different presentations when selling the change to the Board, CEO, senior management team (SMT) and the management and staff. They all have different emotional drivers. We need to note nothing is ever sold by logic e.g., remember that your last car purchase.
Selling by Emotional Drivers: How a Car Sale is Made
Let us look how a second hand car salesperson sells cars using emotional drivers. Three customers over the same day arrive to look at the ‘car of the week’ that has been featured in the local paper. The first person is a young information technology guru, Y generation, with latest designer gear, baggy trousers part way down exposing a designer label on his shorts. The salesperson slowly walks up, all the time assessing the emotional drivers of this potential buyer, looking for clues, such as clothing, the car they arrived in, and so on. The opening line could be “I hope you have a clean licence, as I will not let you out in this beast if you have not. This car has 180 BHP, a twin turbo, and corners like it is on railway tracks.” SOLD.
The second person could be me, with my gray hair visible. The salesperson would say, “This car is five-star rated for safety, eight air bags, enough power to get you out of trouble, unbelievable braking when you have to avoid the idiots on the road, and tyres that will never fail you.” SOLD.
The third person, with designer clothing and bag, is addressed with “This car has won many awards for its design. Sit in the driver’s seat and see the quality of the finish. Everything is in the right place. I assure you that every time you drive this car you will feel a million dollars!” SOLD.
Thus, we need to radically alter the way we pitch the sale of the new performance related pay rules to the CEO, SMT, the board, and to the affected staff. We have to focus on the emotional drivers that matter to all these parties. The emotional drivers will all be different.
Many change initiatives fail at this hurdle because we attempt to change the culture through selling logic, writing reports, and issuing commands via e-mail. It does not work. The new performance related pay scheme needs a public relations (PR) machine behind it. No presentation, e-mail, memo, or paper should go out unless it has been vetted by your PR expert. In addition I would also ‘road-test’ the delivery of all your presentations in front of the PR expert before going live.