When talking about how incentives change behavior, many companies make the mistake of putting the outcome before the change in behavior.

In the Fireside Chat: Solutions to Pay for Performance Issues, we discuss the multiple dimensions of the widely followed Pay for Performance incentive model.

Financial incentives for achievement of quantifiable and pre-determined goals have existed for decades now. Most organizations have the Pay for Performance approach at the core of their rewards philosophy and programs. But such rewards go well beyond achieving business goals. At the Fireside Chat: Solutions to Pay for Performance Issues at The Rewards and Wellness Conclave 2018, the sharpest minds from Sodexo, Vodafone and Willis Towers Watson discussed the critical dimensions of the concept. 

Pay for Performance Incentives Drive Behaviour

Pay for Performance sales incentives are not about the financial reward for the organization, as much as they are about driving the right kind of behavior. If there is a thrust on promoting the described kind of behavior and a healthy sales hygiene, revenue and profits will follow by default. From an institution point of view, it is of absolute importance to focus on behavior, which means focus on the average bill size, as opposed to overall bill size, looking at industry-specific sales, touch points for motor scores and the building of relationships that happen as a result of that. 

Closely related to behavior is culture, and culture dictates what is acceptable and what is unacceptable in any organization. Sales, and its performance work in close proximity to both the concepts of behavior and culture. The other important aspect to this discourse is how individuals, right from when they are brought up and educated, are expected to excel individually – but in an organization, the assessment extends to an entire team. So throughout the year, things like teamwork and collaboration are emphasized, but at the end of the year, the individual performance is evaluated again.  This dichotomy creates an unshakable dilemma and indicates that something is fundamentally broken in the approach we have towards teamwork, individual performance and how we incentivize it. 

There is an indisputable foundation to financial incentives: anyone who delivers more deserves more. To bring parity in incentives would defeat the purpose of outshining your peers, and now, more so than ever, in an environment wherein new age skills will be up on offer at market value, the concept of parity seems obsolete. An equitable culture drives fairness, but the concept of absolute fairness is very hard to achieve. Equal distributions of equity are essential and say the concept of gender pay gay shouldn’t exist, but it exists across companies and culture. These concepts of equity are much more essential than the conventional sense of parity that we have today, and as workplaces evolve into largely contractual engagement of skills fluidly, the concepts of job equivalence or job parity will be harder to define, in response to the difficulty in defining concepts like skill equivalence and skill parity. 

Pay For Performance: In times of Changing Performance

Pay for performance incentive models, at least in Indian organizations, downplay the role of the manager in the entire process. While American organizations moved to manager ownership of budgets and employees years ago, we are just beginning to do so. Indian companies haven’t trusted the managerial capability enough in this space, and not nearly empowered them enough. This has prevented the uniformity of vocabulary of conversations, especially when it comes to work, performance, and goals. Each leader in the organization, without knowledge, training or skills to evaluate and communicate the performance of their team, defines work, culture performance according to their understanding. 

Add to that, an ever-changing paradigm that talks about doing away with ratings, performance scored and bell curves – how does one define pay for performance, when the very definition of performance is evolving? The issue is not restricted to adopting the perfect tool or approach but actually evaluating what needs to be in place to make this model work in the absence of conventional performance parameters. The bell curve merely does justice to how you communicate what you want to communicate. Those who are ditching tradition models under the assumption that it will lead to high performance, better management or better communication are yet to realize one critical aspect of Indian organizations: we do not pay enough attention to build a managers’ capability to communicate and give feedback. Investing in manager capability to universally define what constitutes a good and strong performance, how to identify one and how to reward one will be critical to ensure that incentives continue to hold meaning in the absence of traditional understanding of work. The relativity that exists today, as to what defines great work, results in difference incentives, pay, and bonuses. 

Performance-linked pay at executive compensation level, including stocks, short and long-term benefits, etc. are all pointed towards driving the right behavior. Today, scrutiny at NRC and at the Board level is intense, and there is a renewed interest in how a particular target is achieved. Board members are asking questions, and CEOs are being asked to justify whys and hows, and what-ifs, resulting in tremendous pressure, unlike before. For instance, 40% of the bonus of senior leadership, including the CEO, at Sodexo, is based on engagement and development of employees. Hence, developing people’s capability, improving their engagement and building their skills becomes a consistent effort, implemented across all levels. Plus, this is more of a recent trend, but conditions of severance are being spelled out with crystal clarity like never before. 

Any pay for performance incentive is built on three basic features: design, delivery, and communication. The particular challenge of changing definition or performance, although mistakenly perceived to be a design issue, is actually a delivery, and more so, a communication challenge. The good news is that many leading organizations are working wonderfully well in this new environment, and are investing in building manager capability, allowing them to execute, deliver and communicate better. 

Pitfalls and Challenges

While any incentive plan must critically answer to a clear and definitive incentive strategy, the challenge arises in aligning the same with the expected output. This interplay of the strategy and output determined the structure of the incentive program, and in order to achieve a balance, must be fair, regular, simple, clear and motivating. It needs to be inclusive and fair in order to relay that great performance is noted and rewarded, and should be simple enough to be understood clearly by the sales workforce as well as the administrative workforce which deduces the incentive amount. The end goal should be such that every time a salesperson walks into a meeting, he/she should have a clear idea about the personal incentive attached to the deal. Similarly, if the process of incentive calculation is tough, and it takes weeks to reach the amount – the purpose it defeated. The process needs to be simple and timely, in order to be effective. 

Next, it is essential to review the incentive policies regularly, to account for industry disruptions, unexpected growth spurts, or unforeseen challenges in the company performance. Keeping incentive policies immune from these factors isn’t healthy or sustainable in the long run. The dynamic nature of the environment we exist in must be reflected in the incentive policies, and flexibility is key for any financial incentive program to work. However, what might be viewed as agility from the leadership perspective might be perceived as a constant changing of rules to prevent rightful rewards from the employee viewpoint. Hence, a precursor to any incentive policy is trust between the workforce and the company, and an understanding that the revision is in the best interests of both the stakeholders. Once this sense of trust is established, employers can take employees on board before making fair adjustments to the process. It is indispensable to allow space for incentive policies to evolve in relation to the profile and environment they exist in. 

When talking about how incentives change behavior, many companies make the mistake of putting the outcome before the change in behavior. But what leaders and employers need to understand is that the focus should be to drive a behavioral change, and achieving the sales target will come as a consequence of the same; not the other way round.