The Top

Risks in Pay for Performance

The Secret to an Effective P4P Program is Realizing that We are All Human

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Dan Walter, CEP, President and CEO, Performensation

Dan Walter, CEP, is the President and CEO of Performensation. A popular and frequently-requested speaker, Dan does dozens of presentations a year, combining humor and technical expertise into accessible and practical information. Dan can be found on the web at www.performensation.com. Dan is a featured writer at www.CompensationCafe.com and is the founder of Equity Compensation Experts (ECE)(www.equitycompensationexperts.groupsite.com) a free networking organization. He is also a board member for the NCEO, an active member of the NASPP, GEO, WorldatWork, SHRM, and a frequent adviser at HR.com FoundersSpace.com, Quora.com, Focus.com and OnStartUps.com. Please visit www.linkedin.com/in/danwalter for Dan’s public profile. You can also follow him on Twitter @Performensation.

1Incorrect Metrics

Things, Widgets, Products, Financial Acronyms, Operational Definitions, Strategic Initiatives and Tactical Focal Points

1Incorrect Metrics

Metrics are the “things” that are being measured. These are the foundation of your plan and must represent the measurements of success.

Companies often assume they know what drives performance. These assumptions lead to plans that allow poor behavior by taking attention away from it, or by motivating only one side of the risk/reward formula.

1Incorrect Metrics

Metrics define the PURPOSE of the plan.

If you want people to focus on something, make it a metric.

1Incorrect Metrics

There is no such thing as a “perfect” metric, but for any company there are endless flawed metrics.

Metrics must align shareholders, the company and plan participants.

Without alignment there will be no engagement.

1Incorrect Metrics

Selecting correct metrics requires thinking from the “other side of the table.”

Sit down with leaders and influencers in the departments that are the most critical to your companies success.

Listen to what they feel drives success.Research how to reflect this in the form of quantifiable data.

1Incorrect Metrics

Examples of Incorrect MetricsProviding multiple for additional revenue without considering cost or profit margin

Using Relative TSR as a metric without determining a large enough relevant peer group

Doubling up on any metric also used in other incentive programs

2Poorly Set Goals

Achievements, Levels, Totals, Measurements, Milestones and Comparisons

2Poorly Set Goals

Goals are the levels that define the success of each metric. These are the drivers of your plan and must represent your destination. Goals and the compensation related to them are levers that can make two seemingly similar compensation programs deliver in dramatically different ways.

2Poorly Set Goals

MinimumStill allows for some amount of payout

TargetA stretch, but serves as truly acceptable performance

MaximumDetermines highest possible payout, performance over this level is technically not considered optimal

2Poorly Set Goals

Distribution of Goal MeasurementExplicit

Cliff goals that are linked to a specific payout level

GradedInterim goals that determine payout when performance is between Min / Target / Max

LinearPayouts based on exact position between two main goals with payout prorated to that position

2Poorly Set Goals

Goals serve three main purposes1. Thresholds

A minimum level for a given metric that allows/disallows measure of other metrics

2. ModifiersMultiplier(s) that may be lesser or greater than 100% of the target

3. Accelerators

2Poorly Set Goals

You may be measuring the same metrics as your peers.

Your goals may simply be at higher multiples.

You may have similar goal levels, but the underlying payouts are too leveraged or too forgiving (or vice versa).

2Poorly Set Goals

Examples of Poorly Set GoalsUsing Relative TSR because your peers do, but setting your multipliers to higher leverage, or lower thresholds

Setting a goal to a mythical target level that can only be reached if everything “works perfectly”

Setting goals to payout if performance is lower than historical norms

3Underwhelming Communication

Words, Actions, Plan Elements, Discussions, Presentations, Decisions, and Features

3Underwhelming Communication

Performance compensation is often confusing. Clean, clear communications are essential to engaging and motivating your staff

3Underwhelming Communication

Communications must be honest.

Poor performance cannot be ignored.

Great performance should not minimized.

“Don’t Tell me I’m Great, If I’m NOT!”

3Underwhelming Communication

Initial communications start at plan design.

Your metrics and the features of your plan must be aligned with the high level objective and expectations for the plan

Too often HR pros, focus on “HR goals” and “HR Communication”. Communicate as if you are sitting on the other side of the table

3Underwhelming Communication

METRICSParticipants must understand what each metric is, how each metrics works and how what they do every day impacts that metricP4P should be seen as a unique opportunity for education. Participants will be interested, since future payment is linked.

3Underwhelming Communication

GOALSParticipants must understand the different types of goals (threshold, modifier, accelerator)They must understand why each goal level was set and how each level is linked to future paymentModeling must include Minimum, Maximum, Modeled (mathematical) and Expected (best guess)

3Underwhelming Communication

Communicating PROGRESS is like a marathon:

Mile markersCurrent speed

Proximity of competitorsCoaching on what whether to speed up, slow down, change tactics

Cheering, managing and motivating throughout

4Human Nature

4Human Nature

The biggest risk of all

4Human Nature

Many experts believe the biggest driver to cheating is the desire to have what they perceive others have.

In the case of business, what others are perceived to have is power and money. “SUCCESS”

4Human Nature

Humans are CURIOUSHumans are IMAGINATIVEHumans are INDUSTRIOUSHumans are COMPETITIVEHumans are OPPORTUNISTIC

4Human Nature

SO...We are not just talking about cheating.

We are also talking about coasting, taking advantage of loopholes, ignoring risks, etc.

4Human Nature

Human Nature is one potential risk that outweighs all others. It is seldom discussed in our current environment.

This single risk is the reason why executives, compensation professionals and managers must actively manage P4P.

Simply rolling out a program leaves you vulnerable to “attack.”

4Human Nature

The best Performance Programs, unmanaged, will usually result in someone bending the rules or results to their own favor

P4P works best with competitive people. Without guidance there is a tacit understanding of acceptance. Small misalignments, grow and proximity to the action distorts perception

4Human Nature

Some obvious aspects of Human Nature can be combatted with thoughtful design and great communication.

You can ensure metrics are correct and balanced

You can create goals that represent reality and properly leverage success and failure.

Your communications can be clear, frequent, and well understood

4Human Nature

BUT,

NOTHING BEATS GOOD OLD MANAGEMENT AND LEADERSHIP

The key to Human Nature is that most people prefer to be accepted. They prefer to feel good about their accomplishments. And, most prefer to be lead.

4Human Nature

Pay for Performance Programs don’t Manage people

People Manage Performance

Questions

Dan WalterPerformensation415-625-3406dwalter@performensation.com?

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