Parikh, who is director of product marketing at compensation software development company Callidus (www.calliduscloud.com), recently spoke to BLR on pay for performance.
BLR: How well do companies really link pay with performance?
Parikh: Companies basically end up spending about 8-10% of their gross revenue on variable compensation. That could be a very large amount of money. If you ask them whether they are getting a return on that investment, they may not know. Companies will lay out strategies at the beginning of the year, decide how many people to incentivize, how much money they will spend on it, etc. Then at the end of the year they might ask themselves whether they have achieved the goals they set.
Did they get the performance they were hoping for? A lot of times companies have no way to measure that. That’s why the next year, when they’re going through the process again, the company just says they plan to grow by 10% or something, so they tack 10% onto the quota. They really need to make sure they have a way to measure the return on investment.
Companies should make sure that the solution they use can make corrections throughout the year, as well. Look at what has happened in the last 18 months! You cannot say strategies haven’t changed; they have changed significantly.
How do you accommodate those changes in your incentive program? Is your solution flexible enough to allow you to make changes mid year, or whenever you need to so the program is in line with business needs? You don’t want to be limited by what the technical application is allowing you to do; make sure you’re actually doing what the business needs you to do.
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BLR: What are some things to keep in mind about communicating an incentive program to a group of employees who never had one before?
Parikh: Make sure you have a consistent performance management program throughout the company, and that you’re communicating in a collaborative manner. Managers need to speak to their subordinates, making sure they understand why the objectives are set the way they are set, and that there is two-way communication.
There needs to be buy-in and transparency. If you don’t provide that to your employees, especially in a downturn like this, the new program could have a negative effect on employees. Building trust is equally important as paying out money. Employees need to understand and have a say in how their objectives are set, and that must be at the beginning of the process, not when its time to pay out the bonuses.
While incentive compensation has traditionally been used in large organizations and for two specific categories of employees, the situation is changing. Maybe now is your time to find out why.
Pay for performance, just one of many issues comp and benefits managers must deal with. There’s no shortage of challenges, is there? “Maintain internal equity and external competitiveness and control turnover, but still meet management’s demands for lowered costs.” Heard that one before? Many of the professionals we serve find helpful answers to all their compensation questions at Compensation.BLR.com, BLR’s comprehensive compensation website.
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