Tool Kit - Making a Case for Partnership Pay
It only seems fair on the face of it. If your income — let’s face it, your financial survival — is not guaranteed as an owner of a small business, shouldn’t your employees take some of the risk in return for sharing in your success?
Tool Kit
That is the theory behind variable pay, which is also sometimes referred to as “pay-for-performance,” “at-risk” or “partnership pay” plans.
Under this form of compensation, employees typically receive a base pay less than workers in the same industry, but stand to make much more — in the form of bonuses and profit sharing — should the company do well.
“Variable pay proponents contend that providing tangible rewards for superior performance — a true merit system — encourages hard work and efficiency and serves as an effective deterrent to mediocre or otherwise uninspired work performance,” the Encyclopedia of Small Business on eNotes, an online educational resource, writes. Writing on the Web site of Gaebler Ventures, a business incubator, holding company and venture capital fund, Stefan Martinovic captures the potential advantage of partnership pay in a single paragraph.
“Pay for performance compensation plans are win-win for employees and business owners,” he writes. “When pay for performance salaries are properly implemented, everyone shares a common goal of doing what’s best for the company.”
One reason pay for performance plans are not more widespread is simple to understand.
“To truly pay your best performers, you have to be tough on the folks who aren’t cutting it, Kris Dunn writes on hrcapitalist.com, , a blog devoted to workplace issues.
“If you want to give your highest performers more money you need to pay your lowest performers less. Most of your managers aren’t prepared to sit down with the lowest performing person in their groups and tell them they are getting a 1 percent raise — or no raise at all.”
Many employees dislike variable plans, and it goes well beyond the reduction in their base pay. They argue they are not given enough control over their work to hit the goals the company sets; rewards tends to be unfair — superior performers may receive disproportionately less than they should; and the way performance is measured is not always consistent.
Jack Stack, the founder of Springfield Remanufacturing, agrees.
“Most of those programs provide no incentive to anyone and never deliver the promised results,” Mr. Stack writes in Inc.
“Why not? Because in nine cases out of 10, they are not true bonus programs at all. They are simply profit-sharing programs, and there is a world of difference between the two.”
The problem with profit sharing — taking a percentage of what a company earns, putting that into a pool and disbursing it to employees according to some formula — is that their benefit is limited, he contends.
“For openers, the recipients seldom know exactly how they helped generate the profits, beyond just doing their jobs. No doubt, they enjoy getting the money. But they aren’t likely to think or act differently because of it or to be greatly motivated by it. What’s more, if they keep getting it, they will eventually come to expect it. If they don’t know what they’ve done to deserve the extra money, they will begin to view it as part of their regular compensation — that is, as an entitlement program.”
What Mr. Stack says he favors instead is “a real bonus program,” which he says has these four elements:
¶ Clear goals “that people understand and accept because they’ve had a voice in setting them.”
¶ Frequent feedback — daily would not be too often, he argues — so employees know how they are doing.
¶ “You need to give people an opportunity to work with one another to achieve the goals.”
¶ The targets must require some effort to achieve — if they are too easy, people will take the bonus for granted — but they also cannot be overly ambitious. “Stretch goals,” Mr. Stacks says, “are almost always demotivators.”
On prospect.org, the Web site of The American Prospect, Ezra Klein says there is a logical inconsistency in a reporter writing about variable pay.
“Are pundits, once a year, asked in for a sit-down with their editors, during which they are presented with a comprehensive list of their predictions and opinions, and then offered a bonus based on accuracy,” he asked. Or do publications track how many readers pay attention to a particular article, and pay accordingly?
“Indeed, not only are these practices not in place, but journalists would sob and shriek and scream were they ever to be implemented.”
We are not crazy about his conclusions, but it is nice to be called a pundit.
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