Pulling in the Same Direction: Tying Compensation to Overall Goals

Pulling in the Same Direction: Tying Compensation to Overall Goals
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Management literature today is filled with buzzwords such as “intrapreneurship,” “employee empowerment,” and “total engagement.”

They all boil down to one thing: making sure that every member of the organization is driving the company toward its strategic goals day in and day out. But how closely are your employees’ fortunes aligned with those of the organization as a whole?

How does a front-line employee or mid-level manager know what levers to pull in order to achieve a distant goal? Sure, you can set production, sales, and expense quotas, but a better way is to make sure that each and every employee not only understands their role in achieving corporate goals, but what’s in it for them in terms of compensation. Here are some keys to fostering that understanding:

  • Create goals by starting in the middle. “I’m a proponent of ‘middle-up’ goal-setting,” says Peter DeBellis, a Virginia-based human resources consultant for Human Capital Think. “That’s when functional or business-unit leaders present their view of the goals and the budgets for their areas of responsibility up to the senior executive, who then facilitates normalizing and negotiating those in a transparent and collaborative way across the leadership team.”

By this process, DeBellis explains, organization-wide goals are already directly tied to business-unit objectives, which can then cascade down to role- and even employee-level goals that support the overall objectives.

  • Be transparent. Employees can’t be fully incentivized if they don’t know how the company as a whole is tracking toward its goal. “You don’t have to share everything,” DeBellis explains, “but if you’re basing compensation on net profit, that number should be made freely available on a quarterly basis.”

You should be equally clear about the size of the compensation “pie” and how big a slice each employee can hope for. Here’s a simple example: Let’s say you set a goal of increasing gross profit by $10 million, and establish a bonus pool of $1 million to achieve it (meaning that if the company only reaches 70 percent of its goal, only 70 percent of the bonus pool, or $700,000 will be disbursed). The goal—and pool—is allocated across five divisions, though not in equal measure: Sales is entitled to a 120 percent share, for example, while IT, which has less influence on the result, gets 80 percent, and so on across the organization as well as vertically downward to each employee.

“If everyone knows, on a quarterly basis, how well the company and division is tracking toward its goal, there will be little surprise at the end of the year,” DeBellis adds.

  • Separate discussions of evaluation and compensation. Like many human-resource experts, DeBellis believes that the usual employee evaluation process, which combines discussions of performance with those around compensation, is counterproductive.

“Everyone just wants to get to the numbers, so little of the actual evaluation sinks in,” he says. When compensation is tied to corporate as well as individual performance, it’s even more important to separate these messages so that they are in sync with the company’s financial calendar.

“If you think of it in a linear way, the company completes the fiscal year, the performance reviews are conducted, the results are tabulated, and then, finally, the compensation message follows,” he explains. Just as the overall pool is adjusted by performance modifiers, so, too, is individual compensation. “You could have a star performer who earned 120 percent of her target bonus, but if the business as a whole tanked, she may not receive anything,” he says.

Finally, it’s important to note that tying individual compensation to corporate performance isn’t easy. “It means thinking through corporate goals right down to individual job descriptions, and then having managers evaluate employees on these specific criteria,” DeBellis points out. “If the organizational-level goals are fluid or difficult to quantify or the linkage to employee-level goals is indirect or clouded, even the most well-intentioned efforts will fall short.” Even so, the rewards of such discipline can far outweigh the effort: a streamlined organization that knows where it’s going and how best to get there.

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