The Top 4 risks in P4P (Pay for Performance) 20120611
The TopRisks in Pay for PerformanceThe Secret to an Effective P4P Program is Realizing that We are All Human
Dan Walter, CEP, President and CEO, PerformensationDan Walter, CEP, is the President and CEO of Performensation. Apopular and frequently-requested speaker, Dan does dozens ofpresentations a year, combining humor and technical expertise intoaccessible and practical information. Dan can be found on the web atwww.performensation.com.Dan is a featured writer at www.CompensationCafe.com and is thefounder of Equity Compensation Experts(ECE)(www.equitycompensationexperts.groupsite.com) a freenetworking organization.He is also a board member for the NCEO, an active member of theNASPP, GEO, WorldatWork, SHRM, and a frequent adviser at HR.comFoundersSpace.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.
Incorrect MetricsMetrics are the “things” that are beingmeasured. These are the foundation ofyour plan and must represent themeasurements 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.
Incorrect MetricsMetrics define the PURPOSE of the plan. If you want people to focus on something, make it a metric.
Incorrect MetricsThere is no such thing as a “perfect”metric,but for any company there areendless flawed metrics. Metrics must align shareholders, the company and plan participants.Without alignment therewill be no engagement.
Incorrect MetricsSelecting correct metrics requires thinkingfrom 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.
Incorrect MetricsExamples of Incorrect Metrics Providing multiple for additional revenue without considering cost or profit marginUsing Relative TSR as a metric withoutdetermining a large enough relevant peer group Doubling up on any metric also used in other incentive programs
Poorly Set Goals Achievements, Le vels, Totals, Meas urements, Milest ones and Comparisons
Poorly Set GoalsGoals are the levels that define thesuccess of each metric.These are the drivers of your plan and mustrepresent your destination. Goals and thecompensation related to them are levers thatcan make two seemingly similar compensationprograms deliver in dramatically different ways.
Poorly Set GoalsMinimum Still allows for some amount of payoutTarget A stretch, but serves as truly acceptable performanceMaximum Determines highest possible payout, performance over this level is technically not considered optimal
Poorly Set GoalsDistribution of Goal MeasurementExplicit Cliff goals that are linked to a specific payout levelGraded Interim goals that determine payout when performance is between Min / Target / MaxLinear Payouts based on exact position between two main goals with payout prorated to that position
Poorly Set GoalsGoals serve three main purposes1. Thresholds A minimum level for a given metric that allows/disallows measure of other metrics2. Modifiers Multiplier(s) that may be lesser or greater than 100% of the target3. Accelerators
Poorly Set GoalsYou may be measuring thesame 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).
Poorly Set GoalsExamples of Poorly Set Goals Using 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
Underwhelming Communication Words, Actions, Pl an Elements, Discussi ons, Presentations , Decisions, and Features
Underwhelming CommunicationPerformance compensation is often confusing.Clean, clear communications are essential toengaging and motivating your staff
Underwhelming CommunicationCommunicationsmust be honest. Great performance should not minimized.Poor performancecannot be ignored.“Don’t Tell me I’m Great, If I’m NOT!”
Underwhelming CommunicationInitial 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 planToo often HR pros, focus on “HR goals” and “HRCommunication”. Communicate as if you aresitting on the other side of the table
Underwhelming CommunicationMETRICSParticipants must understand what each metricis, how each metrics works and how what theydo every day impacts that metricP4P should be seen as a unique opportunity foreducation. Participants will be interested, sincefuture payment is linked.
Underwhelming CommunicationGOALSParticipants must understand the differenttypes of goals (threshold, modifier, accelerator)They must understand why each goal level wasset and how each level is linked to futurepaymentModeling must includeMinimum, Maximum, Modeled (mathematical)and Expected (best guess)
Underwhelming CommunicationCommunicating PROGRESS is like a marathon: Mile markers Current speed Proximity of competitors Coaching on what whether to speed up, slow down, change tactics Cheering, managing and motivating throughout
Human NatureMany experts believe thebiggest driver to cheating isthe desire to have what theyperceive others have. In the case of business, what others are perceived to have is power and money. “SUCCESS”
Human NatureHumans are CURIOUSHumans are IMAGINATIVEHumans are INDUSTRIOUSHumans are COMPETITIVEHumans are OPPORTUNISTIC
Human NatureSO...We are not just talking about cheating. We are also talking about coasting, taking advantage of loopholes, ignoring risks, etc.
Human NatureHuman Nature is one potential risk thatoutweighs all others. It is seldom discussed inour current environment. This single risk is the reason why executives, compensation professionals and managers must actively manage P4P.Simply rolling out a program leavesyou vulnerable to “attack.”
Human NatureThe best PerformancePrograms, unmanaged, will usually result insomeone bending the rules or results to theirown 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
Human NatureSome obvious aspects of Human Nature can becombatted with thoughtful design and greatcommunication. You can ensure metrics are correct and balancedYou can create goals that represent realityand properly leverage success and failure. Your communications can be clear, frequent, and well understood
Human NatureBUT,NOTHING BEATS GOOD OLDMANAGEMENT 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.
Human NaturePay for Performance Programsdon’t Manage peoplePeople Manage Performance
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