4 unsaid preparations before you link pay to performance

Performance based payFrom a past few months, we have been convincing Mr. Rajanikant Mehta, owner of a tours and travel business, to introduce the performance-linked compensation for his entire organization.

Currently his organization has over 50 employees with 15 of them working since 5+ years. Mr. Rajanikant has rolled out performance based incentives for Sales [ Note 1] but rest of his teams still have a fixed compensation structure.

Mr. Mehta understands that unless he improves the productivity of all his employees, the bottom line of his business will remain constantly under pressure. Hence, the idea of linking employee pay to performance seduces him. He looks at success of performance based pay systems in corporates and thinks whether he can do the same. However, he is worried whether such an initiative will be well received by his employees.

The dilemma explained above is the same that is experienced by many family-owned businesses.

I think that the success of performance-based pay systems depends on whether a business can internalize a performance based culture. However, this is not easy for most family-owned businesses especially if the business has been in existence since some time.

From my experience, I have found following four strategies helpful. 

1) Preparing employees to understand why historic performance wasn’t enough

It is management’s responsibility to regularly share true market conditions with the employees. Market conditions could be anything from new competitors to commoditization of product or a new legislation that squeezes margins.

The employees have to realize that company’s business will be impacted until they pull their socks up and deliver exceptional performance.

2) Separation of personal relationship from performance

Many employees attribute their position in the organization to the relationship they have with their superiors and not entirely to their performance. Such people will resist any attempt to measure performance unless they are made to believe that their performance will get them as much leverage.

3) Move from an activity-oriented outlook to a result-oriented outlook

By default, most people tend to be activity oriented i.e. they are wired to believe that their job is doing certain activities (Example: Receiving customer calls and passing on the query to right department). This contrasts what performance oriented culture advocates – place focus on result (Example: Ensuring that customer is satisfied with the resolution).

A successful transition can be made by initially rewarding activities (that are known to produce successful results) and then gradually moving to recognizing only results.

4) Consistent demonstration of fairness by management

Lack of demonstrated fairness by management is often the main unsaid reason behind employees assuming that performance based culture will be bad for them. Plain and simple, this a leadership issue.

Unless this point is actively tackled by management, it is easy for employees to assume that the management will use performance based culture to take advantage of them. Thus, they will lack faith in whichever performance-based system the management brings in.

The point I want to make in this article is this – An organization has to be made ready for performance based culture before it is introduced. I believe that these four initiatives will help you in creating that readiness.

What have been your experiences about success of performance based culture in an Indian family-owned business setting? I am looking forward to hear about them. Please use this link to write to me.

 

Note 1: Performance Management Systems (PMS) for Sales function has been successful since financial impact of each employee is clear. The area where most family-owned businesses face challenges is implementing PMS for rest of the functions.

Note 2: The article, ‘4 unsaid preparations before you link pay to performance’, is written based on my professional experience at Pinnacle and other companies. Pinnacle specializes in working with the management of family-owned companies to craft & implement HR Strategies and Performance Management Systems.

References & Credits: Photo taken from Google Images under Creative Commons License. Credits: localsmile.com.au

Comments

  • Very realistic and insightful…pay to performance.

    Regards,

    Satyaki

    Satyaki MukherjeeJanuary 21, 2014
  • Great Article, Deepak ji. Thanks very much for sharing your experiences through these articles. You can consider converting these into a book.

    sunil @risedaJanuary 21, 2014

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