GoalSharing: Varibale Pay to Drive Growth

03/05/07

Robert S. Kaplan and David P. Norton made a splash back in 1996 with the publication of their book, The Balanced Scorecard. It showed companies an effective way to put strategy into action by creating a set of measures both financial and nonfinancial that would help keep the eyes of employees “on the ball.”

Why should HR people care about the balanced scorecard? Because the concept lends itself beautifully to forming the basis for a variable-pay program that some, like Thomas Wilson, a compensation consultant and head of the Wilson Group in Maynard, Massa-chusetts, call “GoalSharing.” Says Wilson, “Goal-Sharing really brings the balanced scorecard to life and it often results in exceptional improvements in performance.”

Why Variable Pay?
Variable-pay programs reward employees above and beyond their base salary for achieving specific results. Why offer one at all? Says Wilson, “Companies realize they can’t provide meaningful rewards with salaries alone. They need something with more impact. Also, variable pay is a good way to improve the overall competitiveness of the pay package it allows you to offer more money while not guaranteeing it.”

GoalSharing provides the punch employers need to recruit and retain employees, as well as to reward excellent performance. Unlike many variable pay programs, it:

Gives employees a stake in the company and its results.

Promotes teamwork.

Can help refocus efforts during a time of change.

Encourages employees to contribute to company success by creating a real connection between pay and performance.

Can lead to breakthrough performance and superior financial results.

Pillars of GoalSharing
How does GoalSharing work such magic? Let’s look at the main components: the “balanced” measures that appear on the scorecard, the targets for each level, and the payout plan.

Balanced measures. The foundation for the GoalSharing program are the three to five measures you choose based on your strategy and needs. Ideally, the measures focus employees on the activities that, done well, keep an organization strong, customer-oriented, and profitable.

As you might expect, financial measures are common: sales, net profit margin, revenue per employee, return on equity, and so forth. Wilson says most scorecards include at least one such financial measure.

But a balanced scorecard consists of more than just financial measures. Less tangible things like customer satisfaction, after all, lead to success.

Common, nonfinancial measures include customer-oriented things like repeat business or on-time delivery; operational measures like quality, productivity, or expenses vs. budget; and even developmental measures like the implementation of training programs.

As the range of these measures suggests, which you select depend on group goals. Wilson says most scorecards are created for those at the business unit or workgroup level. Naturally, then, a scorecard for a manufacturing unit will look much different than that for a fulfillment group. The first might have scrap rate on its scorecard, while the second might include on-time delivery.

Once you choose the measures, list them on the scorecard and weight them. Goal one, for example, might comprise 25 percent of the total, while goal five is worth 15 percent. Weighting measures gives people an enhanced sense of what’s important. Target levels. As the scorecard shows, you set target levels for performance within each measure. Five are common, but some companies have as many as ten.

To the left are “Threshold” levels the minimum you expect from people. If all they do is reach those levels, they’ll get little, if any, additional pay. The targets in the middle represent reasonable targets that, if reached, will result in a nice bonus. Those to the right represent exceptional performance and, if achieved, will net an employee a fat bonus.

Having such steps, says Wilson, “gets people focused on what they need to do next. Multiple levels are like steps on a stair. Each time you reach one it builds momentum to take the next step. People get excited.”

Payouts. In GoalSharing, as with most variable pay programs, you reward people financially for reaching objectives. You need to set up in advance, then, a payout schedule such as the one in the example. That way, people know exactly what it takes to share in the success.

To figure the score, you multiply the target reached by the weighting factor. Then you add up the scores for each measure and compare the result with the payout schedule.

Implement the Program
Conceptually, the program is easy to understand and makes intuitive sense as a method to improve companywide performance. Wilson says most employees grasp the essence of the program without too much trouble.

But this doesn’t mean the program is a breeze to implement or that it’s guaranteed to succeed. It takes effort, and—as ever—the devil is in the details. Here are just a few issues you’ll need to address:

Payout period. Do you pay yearly? Twice yearly? Quarterly? Frequent payouts can result in employees paying close attention to your objectives. However, the more frequent the payouts, the smaller they are. They may not have the impact that one fat, end-of-year check will have.

Also, your business may be cyclical or have ups and downs. What if you have a great first six months of the fiscal year, then a horrendous last half? You might have paid out, over the course of the year, more than you can afford. To deal with this problem, some of Wilson’s clients allocate a portion of the payout to annual results.

Reporting. The success of a Goal Sharing program depends on the timely and accurate reporting of numbers for each measure. If results get bottled up in the accounting department, for example, the effectiveness of the program diminishes or disappears entirely.

Wilson suggests reporting results three to five times in anticipation of each payout date. That gives employees plenty of notice as to where they stand.

Education.Translating measures into daily activities is critical, according to Wilson. “Programs sometimes break down,” he says, “because people aren’t educated about the program to a depth that they understand what to do.”

Supervisors and managers are thus a key part of the GoalSharing program. They must be able to put sophisticated or abstract measures into terms workers can understand. For example, a common scorecard measure is inventory turnover —how many times a year you deplete inventory of an item completely. (Usually, the more times the better.)

An astute manager will put this in terms a line worker will understand: “The faster we enter orders, and the faster we ship them, the quicker we turn over inventory. And when we speed up and hit our targets, we’ll see it in our GoalSharing payouts.”

Setting the right objectives. “Some managers set targets that are too high,” says Wilson. “They think, ‘Why should we pay out unless we reach our stretch goals?’ But if the goal is too high, people get discouraged and don’t even try.”

Trust.“Trust and credibility,” says Wilson, “are the foundation of a Goal Sharing program. Without trust, employees will be suspicious: ‘Where did they come up with these numbers? Are they trying to take something away from me?’”

To instill trust, follow through. According to Wilson, companies sometimes launch GoalSharing programs with great hoopla, then don’t bother to educate employees, or they are late reporting results. Management’s credibility crumbles and the program teeters on the verge of failure.

Maintaining the integrity of the program is paramount. Do exactly what’s promised and never rig the program against employees.

Dealing with deadwood. “People leave companies when managers don’t deal with poor performers,” says Wilson. Under a GoalSharing program, they may leave quicker yet, because success is based on group effort. That puts pressure on managers to deal with poor performers Flexibility. With a GoalSharing program, it’s important to revisit the measures at least yearly. Add, eliminate, or adjust them based on different conditions and different strategies.

Few Immediate Breakthroughs
Don’t expect a GoalSharing program to produce breakthrough success right off the bat. It’s about producing incremental gains through continuous improvement. Yet these incremental gains, says Wilson, “create momentum that often end up helping you achieve breakthrough results. The program increases your overall capabilities, prepares you to take advantage of lucky events and opportunities, and allows you to sustain growth and weather trouble better.”

Consider Including Nonexempts
Consider setting up a GoalSharing program that includes nonexempt employees. In Wilson’s view, “People underappreciate those in support, administrative, or technical positions. By including people at lower levels, you build a ‘we’re all in this together’ philosophy. And that has an impact. Because how a customer service rep treats a customer, or how quickly a clerk collects a bill, has a big impact on organizational results.”

Thomas Wilson, author of Rewards That Drive High Performance