How You Are Paid Says Everything About Your Company
Compensation drives behavior, so what kind of behavior does your company promote? Are you paid based on a strict set of personal metrics that have been defined for you? Or are you paid based on the subjective opinion of your boss, understanding that your company's performance will influence your paycheck?
What resides at the heart of this question is the word “trust.” You might have cringed when you read the second option above, especially if you don’t trust that your boss values you enough to pay you well. You may also believe that the good ‘ol Boy/Girl network will prevail over reality.
This is a shame because it’s in the company’s best interest for your pay to reflect the “value" you bring to it, regardless of any individual performance metrics that were defined for you. It makes sense to most businesspeople that, if you add tremendous value to a company because you played a key role in closing a large deal, you turned around a troubled project, you helped recruit top talent, or it was your leadership that pulled a team together so synergistically that they blew away a customer, then you should be financially rewarded for these efforts—even though they may have nothing to do with the performance metrics originally defined for you.
The problem is that many of the deeds that actually create value for a company are qualitative and can’t be measured, so compensation devolves into some manager’s opinion regarding your contributions relative to those of your peers. For that manager's opinion to accurately reflect your performance—which, remember, is linked to your compensation—you’ll need to trust your boss. You’ll need to trust that your boss is not only aware of your contributions but also doesn’t play favorites.
And herein lies the problem. Most companies don’t like too much subjectivity to creep into performance reviews and subsequent pay raises because it opens the door for disagreement, conflict, and potential violations of any number of regulatory laws and guidelines. Clearly defined metrics, on the other hand, are clean and easy to administer if set up properly. Trust becomes secondary to analytics.
The value you bring to your team or department can make this process even more difficult. In most work environments, we rely on teams to get things done. So, if your compensation package has more to do with individual workers’ achievements than it does the team’s, then overall value may not be achieved at a company level.
Compensation Programs Impact Customer Relations
If you think that this is only an internal problem, consider that customers notice when companies incentivize individual workers at the client’s expense. I have a Mercedes van that I usually take into the dealership for repairs. I’ve noticed that, when I take it in, they always seem to find something else that’s wrong. Recently, the van broke down while I was out of town, in Austin. Instead of taking it to the dealership, I looked up “Mercedes auto repair shops” on Yelp and went to the one with the highest ranking.
This place was immaculate, with all of the latest, state-of-the-art diagnostic and repair equipment. I noticed that multiple people were helping to fix the van, and I complimented the young man who owned the shop on the teamwork I observed. He said the reason they worked so well as a team was because they were all on salary and received no commissions. He mentioned that he used to work at a dealership, and one of the reasons he left was because they paid their service repair people based on how much they charged for repairs. In other words, they were incentivized to find problems that needed to be fixed. The bigger the bill, the more they made. He wasn’t comfortable with this conflict of interest and started his own shop. Now he owns the #1-ranked service center for Mercedes in Austin and is expanding dramatically, having opened up two more shops. I trusted this guy and told him I would be a return customer.
Later on, I was in a car dealership buying a new truck for myself. (Yes, I am a Texan.) I had set up a meeting with a seasoned salesperson, but when I arrived, he was with another customer. A young man introduced himself to me and immediately took charge of the transaction until my sales guy was freed up. I told him I was impressed by how well they worked together instead of forcing me to wait in some lobby, as would have been the case at many dealerships. What he then told me came as a surprise. He said the dealership had been acquired by Warren Buffet’s company, Berkshire Hathaway, a few years ago, at which point they did away with commission programs.
Hold on. Are you kidding me? A car dealership with salespeople who don’t get commissions? Yep. He said they swung a deal with Ford at the corporate level so that the dealership got bonuses based on their quality of service. They believed that if they didn’t pay their salespeople commissions they would work better as a team and deliver higher quality to their clients. That quality would then convert to more sales. The result after three years was much higher quality ratings with a substantial increase in the volume of cars sold. Having bought many cars for my family members and me in the past, I felt the love at that dealership and would return in the future.
Promoting Love-Based Trust Moves Workers to Go “Above and Beyond”
As CEO of Healthlink, I frequently saw team members rising to the occasion to solve tough client problems or jump into close a deal. If we needed help from a lead salesperson on the West Coast with a client on the East Coast, we never saw anything but arms and legs flying to show the kind of brotherly love needed to solve the problem. We only paid people based on the value they contributed to the overall company. There were no individual incentive plans.
We had superstars who were excellent additions to the hiring team, as they never allowed anyone to be hired into the company who they didn’t believe would be successful in our culture. We had other employees who gave up personal time on weekends, when they weren’t focused on their primary client, to help us develop products that needed their expertise. These behaviors don’t have performance metrics tied to them, yet they are what can differentiate a company from competitors. They add value that can’t be measured.
At the top of the org chart, value can be easily defined based on short- and long-term financial metrics. CEOs should be paid based on the value they bring to shareholders, which will be an objective measure of financial success (unless their board has other goals). This does not mean that the CEO’s goals need to be broken up and passed down and down and down the org chart, to the foot soldiers in the cubicles and on the sales team, in an attempt to create accountability.
Accountability may be one of the most misunderstood words in the business world.
It’s far easier to have accountability if there are numbers that define it, and accountability is important at a certain level of the organization. But when business leaders create management systems primarily based on hard measures that define accountability, they may lose one of the most powerful forces we have in building successful companies: the power of people who feel empowered to do the right thing because they feel trusted.
The common thread that I’ve found connecting corporate compensation programs based on value contributed rather than on individual metrics has everything to do with trust. Companies that don’t trust their managers to fairly and subjectively judge an employee’s performance will need a metrics-based system with little subjectivity. Companies that have been built with cultures based on trusting leaders to show good judgment can apply subjectivity in measuring performance and reward their hard workers and team players in doing so.
To be fair, there are many job roles where teamwork isn’t necessary and individual performance is what gets things done. In many of these roles, money can motivate people to go above and beyond. If these compensation programs work and have proven to be successful at building revenue and result in higher quality, them more power to them. But where teams matter, these programs can ultimately pit people or divisions of companies against each other resulting in lesser results.
The method by which you are compensated will define the culture of your company. Do you trust your manager to judge your performance void of metrics? Have you felt the power of teamwork and been paid based on your role in helping the overall company succeed?
Please chime in. I would love to hear your thoughts.