Tuesday, September 27, 2011

Before You Link Pay To ANYTHING...

Rob Markey, head of Bain & Company's global Customer Strategy and Marketing practice, wrote a great "series" of HBR posts this month on the perils of linking pay to customer feedback (The Dangers of Linking Pay to Customer Feedback and Before You Link Pay to Customer Feedback).  As any of us who've considered using customer feedback metrics in incentive design know, this can be a potential minefield.  Markey's cautionary advice on pay linkage is well written and worth our consideration beyond the boundaries of customer feedback metrics ... before we link ANYTHING to pay.

With that in mind, Iet's consider his five essentials - preconditions for trust and credibility - in the context of broader compensation design:

Essential #1: Truly reliable feedback and metrics. If your metrics aren't trustworthy, if they vary widely from one time period or unit to another and you don't know why, your compensation system won't be trustworthy either.  This "essential" has obvious application to any metrics we might consider tying to pay.  Markey provides some great suggestions for digging into prospective metrics to assess their viability with questions like is the sample controlled and stable? and are response rates high enough to reduce responder bias?

Essential #2: A clear link to financial and strategic outcomes.  Your metrics must correlate with financial and strategic goals.  I've posted before about the importance of grounding incentive design in value creation.  Markey makes the same point here: Without a confirmed link between your selected incentive metrics and business outcomes, your incentive system won't last long.

Essential #3: Processes and tools for understanding root causes. Markey uses the example of a company which began linking improvement in customer feedback scores to executive compensation before it had developed the discipline and processes for truly understanding those scores.  The company's managers - understandably - felt helpless and frustrated.  This is perhaps our most common mistake with incentive plan development, one that critics like Alfie Kohn and Dan Pink nail us on with good reason: throwing incentives at a problem before/without understanding or providing the tools to deal with its root causes.

Essential #4:  Organized learning.  The root cause discipline noted in #3 above must be supplemented with the means and the leadership support for learning and improvement.  Again, often an area where we are at fault when we try to implement incentives in lieu of learning (I've seen it tried and I'll bet some of you have, too).

Essential #5:  Repeated communication.  Why, Markey asks, do so many leadership teams spend countless hours devising the details of incentive systems and then under-communicate their intent?  Amen, man.  Although, as my Cafe colleague Margaret O'Hanlon and I have both noted in recent posts (mine here, Margaret's there), effective communication in this age of information overload is more about creating patterns than repeating messages.

Sometimes our best advice comes from outside the profession.

Ann Bares is the Founder and Editor of the Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University's Kellogg School and is a bookhound and aspiring cook in her spare time. 

Thanks to Ann Bares / Compensation Café

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