Originally published - November 27, 2006
A paradigm shift has occurred in administrative human resources (HR) management. Where it was once mostly responsible for mundane staffing and personnel issues (such as hiring, employment policies, handling pay, retirement plans, and benefits), it now plays a much more strategic, human capital management (HCM) role in supporting the evolving workforce and its needs. To put it another way, while decades have been spent investing in automation technologies for better use of tangible assets, only recently have enterprises begun to invest in optimizing human capital. Tactical and administrative HR management is accordingly morphing into strategic HCM. For more information, see Thou Shalt Manage Human Capital Better.
To recap, HCM is broadly about the alignment of the workforce with corporate goals and strategies, which can be achieved through (among other things) effective employee acquisition and retention techniques, incentive and compensation management, performance monitoring, resource management, and training. The most progressive companies have thus been using best-of-breed HR and HCM technologies (although these can be part of a broader packaged enterprise application suite) for attracting, hiring, training, motivating, and managing their people. Software applications are getting more and more sophisticated to help companies with these tasks, and as these solutions continue to evolve and better communicate with one another, user companies will have more seamless access to methods and data to manage their employees throughout the employee life cycle.
Some might argue that HCM revolves around better performance management and employee compensation, since maximizing performance and ensuring accountability become two key goals in an era of economic downturn. On the other hand, as the economy rebounds and talent wars intensify, companies also have to leverage traditionally elusive “pay for performance” technologies that successfully automate and link compensation planning with business and employee performance. Thus, there is a true need for much tighter integration between performance management and compensation, regardless of the economic milieu, so that exemplary employees can be rewarded more often (and feel truly special to the enterprise). This is in opposition to the outmoded, blanket-regulated, across-the-board annual basis that typically produces mediocrity.
Performance management systems often feed into or include incentives or compensation management systems in order to more justly distribute merit-based pay increases. Before deploying such a system, managers would customarily review employees annually around their date of hiring, often with the result that well-deserving employees would not get the increase they deserved simply because the pool of available money had already been spent by the time they received their reviews.
Surprisingly or not, compensation represents more than 60 percent of total corporate expenditures, yet most Global 2000 firms are still not properly rewarding their highest-performing workers. Indeed, except for sales forces, rewarding and motivating employee performance through variable compensation largely remains a time-honored practice (as in the case where employees can take some time off as a reward), especially in the private sector rank and file. Yet a well-deployed incentive and performance management system should ensure that employee activity and behavior is focused company-wide. It should also increase employee and company productivity potential, deliver more profitable operations, and increase the likelihood of greater shareholder value.
In other words, when one rewards a person for good work, that should motivate more good work. Conversely, when everyone is at a certain a pay level, regardless of whether work is done poorly or exceptionally, such an environment can prove to be a disincentive for performance—witness an anecdotal proverb by indolent workers from former communist countries: “No one can pay me as little as I can perform.” In many cases, an employee's discrete performance is managed only when the firm has to fire people and note their behavior (as a necessary warning), and none of that relates to aligning people to the goals of the corporation, coaching them about doing things well, or rewarding them for that.
In other words, by implementing a holistic employee performance and compensation management process across the enterprise, corporate strategy can be aligned with individual goals and objectives (and properly communicated), whereby actual performance against those goals has ramifications on individual compensation and rewards. This should drive behavior and attitude towards executing the corporate strategy, with improved employee satisfaction and loyalty as a result.
For these reasons, many companies have abandoned the outmoded practice of putting something extra in the pay envelope (or even offering a material token of appreciation, such as a bottle of wine, if not the 13th “bonus” check) for its employees at year-end holiday time. Instead, companies are increasingly attempting to tie pay to measurable performance. Many studies have reported that the number of companies with at least some type of performance-related compensation plan has grown from 47 percent in 1990 to over 80 percent in the early 2000s. Performance compensation, or pay-for-performance, has long been a key component of paying sales forces, but its shift to other areas of the workplace has come about because of the increasingly competitive nature of business.
More comprehensive performance management systems nowadays include a stronger link to upstream business goals and objectives, as well as a tighter connection to rewards, including merit pay; short-term variable incentives (such as bonus or commission awards); and longer-term incentives such as stock grants. Some HCM software vendors offer succession planning software that builds on performance and training systems to identify likely candidates for jobs further up the food chain. Again, the aim is to make people a competitive advantage, and to ensure programs that pay for performance and reward people for achieving goals that move the enterprise forward. These capabilities should help users not only hire a higher quality of employee, but also to better track that employee's performance and establish a stronger link between performance and compensation. The enterprises want to be able to raise the bar for high performers, while placing low performers on a performance improvement plan.
According to recent Accenture customer relationship management (CRM) research, motivating and rewarding people, superior customer service, turning customer information into insight, attracting and retaining people, and building selling and service skills have the highest potential dollar impact on the pre-tax profits of $1 billion (USD) business units. This impact is measured in the millions of dollars—for instance, with $13 million (USD) coming from properly motivating and rewarding people, and from superior customer service. These impacting activities also help these units move from being average to high performance ones.
Sales Incentives Still Lead the Way
The rest of this article will focus on managed rewards systems that have long been practiced (and that were first implemented) in the area of sales and service through commissions, gain sharing, merit-based bonuses, and other incentives. There is no question that any astute sales force is driven by incentive plans, whereby the more a salesperson sells, the greater the rewards (in tune with the concept of “dangling a carrot before the mule”).
However, sales and field service persons are definitely a tricky crowd to manage and motivate—they can be valuable and instrumental to the company’s success (after all, by bringing the company’s product to the market, they bring in the “daily bread” and maintain the company’s top line [revenues] and market share), but they can also bring the company down in multiple ways if unhappy and disenchanted.
While being highly mobile and communicative, many salespeople are not particularly loyal to any product brand (at least not as much as to higher earnings), which makes many industries quite “incestuous”—a good example being the software and hardware sectors. Over the last several years, these sectors have seen many sales folks switching employers amid a few fierce competitors. Poor incentives and compensation not only hit a company's top and bottom line, but they also affect worker retention, particularly with a revolving-door minded sales force. In many exit interviews, salespersons will often cite a lack of a decent sales compensation system, implying that using pesky spreadsheets and snail mail to inform the sales force and executives how they are doing is not the best way.
Sales folks (as well as the indirect channel of brokers, distributors, resellers, retailers, etc.) are understandably vigilant about tracking their expected commissions, since figuring out what they are owed every month means the difference between planning a vacation, buying a luxury car, or simply paying the bills. Whoever works on commission can be rich one month or broke the next, and being able to calculate personal goals and potential gains is highly motivating, especially against the backdrop of not having a (significant) fixed income.
On the other hand, the company has to make sure that sales employees are not unjustifiably overpaid, as some studies indicate that companies overpay up to several percent of total compensation (for example, Gartner and Forrester Research estimate that, on average, organizations overcompensate their sales professionals between 3 and 10 percent annually). This is a notable chunk of change, given the indications that more than a trillion US dollars are spent worldwide annually on sales and variable compensation plans.
One should also not forget that some sales folks might even consider bloating their claims, especially in the case of complex and frequent mergers with a consequent lack of control between disparate systems. Even before the well-known accounting scandal and bankruptcy in 2002, former WorldCom reportedly had faced another kind of bookkeeping shenanigan, since as much as $4 million (USD) in phony sales commissions was pocketed by more than a dozen crooked employees.
So inefficient can the customary manual performance and compensation systems be that it may take three or more months after the target date to reward sales and service professionals and the channel, which can lead to the costly problem of overpayment. For instance, one satellite communications company with a large distribution network often took too long to pay its distributors the sales compensation owed to them. As a result, the company would regularly receive many double submissions for compensation credit, and for the sake of not losing the relationship with that channel, the company preferred to make a mistake on the side of overpaying rather than underpaying.
But, just as problematic is underpayment, since if sales and service professionals do not clearly understand their rewards structure (and as a result, incorrectly calculate their expected rewards), they will be unpleasantly surprised to receive less than they had anticipated. This creates frustration, dissatisfaction, and disloyalty, and is a major impediment for productivity, as it takes time away from being in the field and trying to generate business.
Exacerbating the problem is that mistakes in the company's favor are almost always caught by the employees, but errors in favor of the employee must be caught by the employer, which is a time-consuming endeavor. The errors are attributed to an array of labor-intensive, costly-to-maintain, customized (or even manual) commission systems that, according to the Aberdeen Group, cost companies about $1,500 (USD) a year to track and report compensation for a single sales person. If one multiplies this by the number of compensation-based staff and channels in a bank or insurance firm (read several tens of thousands), one should then get a picture of major unnecessary administration costs to add to actual over-spending on commissions.
In any case, this atmosphere of complex calculation formulas and anxious employees leads to the well-known practice of so-called “shadow accounting,” or sales folks privately (owing to the widespread culture of mistrust) keeping track and calculating their earnings to make sure they get paid, and often bickering and wrangling with the accounting and payroll departments when they feel shortchanged.
In addition to the conflict and bad blood, these dispute settlements only result in a distraction from more productive work for all departments. The scenario is all too familiar—sales people keep asking where the numbers on their checks come from, finance has difficulties with tracking sales contests, and management still does not know what impact changes in incentive plans are having on corporate goals. It would thus be quite useful if the companies could send frequent and accurate updates to employees via the Web or e-mail, deterring shadow accounting and a lengthy reconciling of shadow accounting with official accounting—which again, can divert time away from meeting with customers and prospects, and can also lead to squabbling between the sales and accounting departments.
This is part one of the five-part series Thou Shalt Motivate and Reward Workforce Better. To read subsequent parts of this series, please click here: part two, part three, part four, part five.