High Performance

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Retailers are taking a new look at the old way of compensating workers. Familiar reward mechanisms such as the annual seniority-based salary hike and the automatic year-end bonus are increasingly viewed as relics in need of retooling.

No mystery why: Faced with increasing competition for the consumer's discretionary dollar, retailers feel a greater need to inspire worker loyalty and dedication to the bottom line. Many feel the conventional reward system isn't getting the job done.

The root problem is that the tools employers use to motivate achievement are too often considered entitlements by recipients, according to Ian Jacobsen, president of Jacobsen Consulting Group, Sunnyvale, Calif. "I have yet to meet an employee who, on the first payday after a raise, says, 'Wow! Look at my paycheck. I'm going to bust my buns for the company and strive for my very best because I am so pleased with what I am making.'"

Worse, the best employees can feel trapped in a tradition-bound salary structure. "The top performer who sees a slacker receive the same 4 percent annual bonus recognizes an inequity," cautions Daniel P. Moynihan, a principal at the consulting firm of Compensation Resources, Upper Saddle River, N.J. "This breeds discontent. Without a better incentive to work hard the employees will tend to do just enough to get by." Meanwhile, ongoing salary increases and bonuses bloat payrolls until labor costs exceed value received and the business becomes uncompetitive.

Rewarding Hard Work

Enter "pay for performance," intended to spark motivation by tying a portion of compensation to the actions individuals take to enhance business profitability. "If you don't tie pay to performance you are not using what is potentially a very powerful tool," says Mae Lon Ding, president of Personnel Systems Associates, Anaheim, Calif. "Given that employee compensation is one of the greatest expense items on most business-income statements, it's a terrible waste to not use it as effectively as you can."

Performance-based salary increases and bonuses are sometimes referred to as "at risk" compensation. Because of the link between achievement and pay, the employee who fails to get results risks losing some money while the go-getter takes home a fatter paycheck.

The result is a win-win situation for employer and worker. "Performance- based pay provides an opportunity to keep fixed compensation low while providing variable incentives to employees," says Moynihan. "Suppose you pay an individual a $50,000 salary and offer a 10 percent incentive based on personal and business success. The high achiever makes a bonus. But if objectives are not met, the employee still gets $50,000." While the business has not inflated its fixed costs, the employee still has a chance to earn more. The benefits of this alternative pay structure are not just for big players. Pay for performance is just as critical for smaller organizations where the work of any individual accounts for a greater portion of the organization's total labor cost. "The whole performance culture is pervasive in business," says Moynihan. "We're talking about every business, from the large corporation right down to the oneperson shop with an assistant."

Quantify Accomplishment

The challenge for employers is to identify quantifiable workplace results that employees feel they can influence by their daily actions. What sounds easy in theory can be difficult in practice. "To do this right requires a significant effort to establish standards and objectives and then to measure performance against them," says Ding.

Many employers start by designing reward systems for their salespeople, whose work can often be assessed more easily than support staff. "Tracking the level of sales for each person is important," notes Ding. And while racking up sales is one thing, cultivating loyal customers is another. "Try to identify who is selling to specific customers and how often. Salespeople should be rewarded for creating customer loyalty."

The opposite can also be true: The salesperson who is making a great number of sales may also have a rushed, impatient manner that irritates your customers. "Service is the key distinguishing factor among retailers, so it's important to have a bonus plan that rewards employees for quality customer service," adds Ding. "One great way to measure customer service is to use the telephone, a mailed survey or the Internet to find out how happy people are with your store."

Tracking the work of salespeople by the ring-a-ding of cash registers is somewhat self-evident. But how about all those support people on your staff? "The biggest challenge is finding a way to measure performance that is fair and reasonable," says Moynihan.

"For results-based measurement you need to ask, 'What is this person's job, and how well are they doing it?'" Perhaps a receptionist answers the phone before three rings or greets customers in a cheerful and professional way. Or perhaps he volunteers for extra work. "It's not always easy. Every organization is different," he says.

Ding suggests a source for guidance: "Consider asking employees how they measure their own performance. Often you will hear good ideas."

High-performance employees are not Lone Rangers. They work well with others. Identify team performance parameters and set suitable bonuses for team members. "Assess not only individual performance but also how your departments and groups are performing," advises Ding. The same consideration applies to company performance: Part of the individual's compensation should be tied to the larger picture. That's where profit sharing plans can come into the picture.

Reward Frequently

The traditional year-end bonus comes with a significant downside: Because the employee loses sight of the bonus through the year, it loses its ability to motivate. "The employee who gets a larger bonus than expected may be extra motivated for a week or two, but the value melts with time," says Jacobsen.

Usually employees have long lost track of how the extra compensation ties into their workplace activities, viewing the additional money more as the result of luck than as the reward for work well done.

Far better are periodic performance-based bonuses accompanied by coaching, a combination which sets up anticipatory feelings of success. Keep employees informed continually about their progress, suggests Ding - at least once a quarter and ideally once a month. "The value of an incentive plan actually comes before the payout, when people are informed about how well they are doing against your plan objectives." The goal is to maintain what consultants call a "line of sight" between deed and reward. When this is present the employee understands how his or her performance affects business profitability and the rationale for the compensation increase.

And what if things are going badly? Even then people can be motivated. "Employees want a chance to make incourse corrections," explains Ding. "If you get to the end of the year and your employees are shocked to find out they did not meet their objectives they become very demoralized. Your program can turn into a disincentive plan.'"

Visual cues can help get your message across. "Preferably the ways for tracking performance should be easily understood and sufficiently timely that employees can monitor their progress and make corrections when they are falling short," advises Jacobsen. "I've used a thermometer or a couple of them when the measures were easily displayed that way. I've used a dashboard or control panel when there were several critical measures. Display them in a place where everyone covered by the plan can see them so everyone stays focused."

Track Results

How can you tell how well you're doing? "First, ask people how they feel about the plan," suggests Ding. "Second, observe people's behavior: Are they acting in a more motivated way and paying closer attention to things that are really important? Third, look at your financial performance. Is it improving?"

Assure success by continually expanding your plan's scope. Include more people and develop morerefined performance assessment parameters while soliciting feedback from participants. Maybe it's a lot of work, but the payoff can be considerable. And despite the time and effort required you really have no choice but to make this investment in your future. "Performance-based pay has become an expectation and a norm," concludes Moynihan. "Not having it will make you less competitive."

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