Performance Based Pay

Designing Performance Incentives for Your Business

In a challenging economic environment like ours, the only way to ensure the continued viability of companies is to focus on performance and reward it accordingly. What should be on the minds of executives is how they can effectively measure and manage performance at all levels within their organisations. Organisations need to design performance incentives schemes that drive business success.

The best option in rewarding employees is to invest in the development of variable pay schemes that are directly linked to the achievement of the company goals. If your organisation has done well before there is no guarantee that you will continue doing well in the future. The only way to guarantee future success is to focus on issues of performance and rewards. Embracing an approach such as the balanced scorecard that gives a holistic view of the company’s key performance drivers is a good starting point. Within this framework you are assured that the things you are measuring will have a direct impact on the success of the organisation. If you are still measuring performance for the sake of it you are probably wasting your company’s resources.

Routine performance measurement systems that have no bearing on the business strategy of the organisation should be discarded now. Businesses should strive at all cost to link the measurement of performance to the reward systems. Incentives schemes should reflect the heightened interest and new thinking in measuring performance.

The starting point in designing performance incentive schemes is to ensure that you have an effective and objective system of measuring performance. Your schemes should not reward people for achieving financial targets alone. It should be designed in such a way that you also reward performance in those areas that drive financial success like the customer, internal processes and your people initiatives.

The underlying model today should be to build incentive schemes as an integral part of your remuneration strategy, reflecting the belief that everyone in the organisation can and should be expected to contribute to the company’s success. Besides the base pay strategy which, in actual fact, has little to do with the individual’s contribution to the business, organisations need to institute variable pay schemes in order to drive business performance. In variable pay schemes payout is contingent upon the achievement of clear business targets resulting in no added cost to the business. In other words the schemes should be self-funding.

In the design stage of the performance incentive schemes it is important to ensure that there is buy-in from senior management. You can even start by implementing incentives schemes to cover your senior managers and cascade it to the other levels in stages. Incentives schemes that are based on targets that people have no influence over will not lead to the desired business results. For example most profit share schemes are based on measures that are independent of employees and are driven by economic factors that employees have no control over.

For incentive schemes to succeed, organisations need to institute a complete culture change in the way rewards are managed. There is need to build a performance culture that will help erase the historical emphasis on base salary that seems to have permeated remuneration practices in the country. The truth is employees are not yet ready to live with the risk of earning a moderate base salary supplemented by performance incentives. For your organisation to achieve that level of understanding there is need for careful planning in the design stages and a well-coordinated communication strategy in the implementation stages. This will enable employees to see the connection between their efforts, the overall business results and their share of the incentive scheme payout. Most of the profit share schemes organizations that are operating at the moment have not been designed properly. As a result employees get payouts based on a target that they have not helped achieve. The end result is that the schemes do not benefit the business at all in terms of improved performance. Schemes of this nature create an entitlement mentality since there is no noticeable link between the achievement of business targets and their effort.

It is also important to note that incentives schemes are not a substitute for bad management practices. The incentive scheme will only add value in a business that has a well-coordinated business strategy. Copying what other organisations are doing will not help either. You need to have a system that addresses your own needs, hence the need to design a system specifically for your organisation.

If you are one of the CEOs who have not considered the option of paying employees part of their remuneration as a variable component to support better business performance, it is high time you got over that hurdle. Successful companies are those that are seeking and designing creative compensation systems that reinforce business results.

Compensation models that are dependent on the base salary served our country well in the past. Now is the time for industry to design performance incentives that drive business results. The truth is employees want to work for successful organisations. What they need is guidance from the executive on how to achieve success, hence the need for the latter to take a leading role in ensuring that the company achieves business results and people are rewarded accordingly.

There has been a drastic increase in the number of companies operating employee profit share schemes. While the use of incentive schemes such as profit sharing is prevalent in a number of organisations, the impact of such schemes on employee behaviour and company performance remains unclear. This in some cases has resulted in some companies withdrawing such schemes because they could not sustain them in the face of dwindling profit margins.

A number of organisations have introduced incentive schemes in a bid to shift a portion of their payroll costs to variable pay. In most profit share schemes, payout is determined by one or two financial measures and the distribution of proceeds is tied to each employee’s pay as a percentage of the total payroll. Group schemes like profit share fail to specifically direct or reward individual employee behaviour.  As a result, such schemes have produced somewhat limited effects with respect to improvements in employee performance or company profitability. These schemes do not differentially reward individuals who perform well compared to the poor performers. This fact alone can increase perceptions of inequity in the whole remuneration structure.

Another problem with ordinary profit share schemes is that there is very little effect on employee behaviours, so there is little or no impact on company profitability. In most cases profitability of the company is so remote from the average effort of employees on the job.  Profits are generally impacted on heavily by a number of other factors such as company strategy, interest rates etc, that are totally outside the control of ordinary employees.

When it comes to designing performance based pay systems, companies normally face the dilemma of whether to reward individual or team performance. The downside of rewarding individuals is that, cooperation between them may become a problem.  On the other hand, if you reward the team, it might promote free rider behaviour and demoralize the high performers.

The best option out of this dilemma is to come up with a profit share scheme that takes into consideration both team and individual performance. Key measures to be used for the scheme should cover the key drivers of the business i.e., financial, customer, people and internal business processes. This allows employees to focus on a set of balanced performance measures that drive overall company business goals.

One such scheme is called the Financially Funded Goal Sharing Scheme. In this scheme payout potential is determined by a measure of profitability, just as in profit share. However the payout is conditional i.e. tied to the achievement of additional goals that are more meaningful to and controllable by employees. The latter will have to earn their profits by achieving various performance goals.

How does such a scheme work? If you achieved your profit targets as a company, you will have a gross profit share allocation that will be distributed only on condition that you have achieved other goals such as operating income, operating costs, value of new business, customer satisfaction index (e.g. 95%) and level of skills growth in the organisation. Without passing the above hurdles no profit payouts will be made. In such schemes companies normally share 5% or so of their target net profit and maybe 8% of any profit above target.  Whatever figure comes out of this process forms the company’s gross profit share allocation.

The gross profit share allocation is then deposited into a pool called the net profit share allocation on the basis of achievement of a number of other goals. Each goal is allocated a priority weight that determines how much will be shared as a result of the company having achieved that goal.

How much does each individual get then? What each employee will get depends on their individual performance. Depending on the rating scale you are using in your performance appraisal system you can allocate the percentage points per rating that each individual employee will get. These percentage points will be used in a formula that includes net profit share allocation and total salary bill. For this system to be effective you need to have a performance measurement system that is linked to key performance drivers of your business and it should be credible in the eyes of employees.  

The major advantage of such a scheme besides fostering teamwork is that it ensures that the company will not share the profit (the gross profit share allocation) when other measures on the company’s scorecard are below the targeted performance. This setup ensures that at no time will the company share profits when its survival is in danger even though they have made profits.

Profit sharing schemes are normally established to encourage greater financial performance and the need to lower relative labour costs. They also create a sense of common fate that normally help in erasing the entitlement mentality to performance. For profit share schemes to succeed there must be management credibility and trust otherwise the system will not work. Participation of employees in the design stage is also critical, and this must be supported by open communication system. Above all, scheme rules need to be very clear outlining the conditions covered under the scheme.

Organisations need to realise that profitability years are rare hence there is a need to manage employee perceptions and expectations. In most cases employees end up viewing the plan as a guaranteed benefit irrespective of the profitability of the company. If the link between organisational profitability and payouts is not clearly articulated it can create resentment. Employees may also view it as a ploy by management to use the plan as a low pay supplement.  The existence of uncontrollable factors that impact on profitability also affects the credibility of profit share schemes.

If all the necessary conditions for success are adhered to in the design stages, profit share schemes can help the company motivate staff to achieve organisational goals. 

Memory Nguwi is the Managing Consultant of Industrial Psychology Consultants (Pvt) Ltd a management and human resources consulting firm. Phone 481946-48/481950/2900276/2900966 or cell number 0772 356 361 or email: mnguwi@ipcconsultants.com or visit our website at www.ipcconsultants.com

Do Your Job Or Leave!

Stop Complaining and do your Job or Leave!

Working for any one employer is a choice. Therefore employees must understand that if they are not happy with an employer they are free to look for a better employer. Employees must move away from putting all the blame on their employer for everything that goes wrong in their own lives. Employees must realise that they work for their families and not any employer. Yes they are employed by an employer in order to work for their families. Before complaining, look at what you have contributed to the organisation first. Most of the employees who complain are habitual poor performers who complain all the time in order to hide their poor performance record.

This is made worse by an incompetent management team that has no clue on how to lead people. The majority of managers have appalling people management skills that affect the morale of staff. They are where they are not because they know better than those they lead but because of their connections. Improper promotion systems have lead to the elevation of incompetent managers to positions of authority. The majority of these managers think like “employees”.  They are in the workers committees by proxy. They direct workers committee proceedings through their people in these associations.

It has been an interesting observation that the internet contains very little information on how employees can individually improve their work performance but contains thousands of articles on how MANAGEMENT can enhance employee productivity, how managers can motivate employees, how management can improve the workplace to enhance productivity, job design methods etcetera. Most information is targeted at management. What does this say about employee productivity? Are we saying the onus is on management to improve productivity? Are we saying the employee has to be pushed and cajoled into working by management?

Let us go back a little bit and trace the meaning of the word “Management.” “Management” comes from Old French ménagement “the art of conducting, directing”, from Latin manu agere “to lead by the hand”) .This definition is interesting because it traces the root meaning back to the Latin phrase meaning “to lead by the hand”. Leading by the hand implies giving direction that is stronger than just a passing suggestion yet still fairly gentle in approach. Leading by the hand also implies that the person doing the leading is first going where the follower is being lead. The leader is not asking the follower to do something he is not willing to do himself.

Good enough definition but there is no mention of the one being led. Can the one being led by the hand go where he does not want to go? Sure we can argue that he can be forced into going but would it not be easier if the one being led actually wanted to go where he was being led to? Is the responsibility of getting to the destination all management responsibility or should there be input of some sort from the employee?

I think the employee has been left out of this equation for too long. It is of no doubt that management should drive productivity but employees should be responsible for this process as well. They should individually have a role to play in productivity enhancement. So what is this role that employees should play?

Change of mindset is the first on my list of “to do things” for the employee. This at the end of the day is up to the employee. Management can facilitate this process in various ways like training for instance but at the end of the day the bark stops with the employee. Are you willing to change? It is a bit like an alcoholic for instance. They might receive a lot of information about the dangers of drinking and the benefits of not drinking but until they make up their minds to stop, it is all just cheap talk.

So how can you as an employee change your mindset? Being positive is a start. Be positive about your life and the organization you are working for. Stop complaining. If you want to leave the organization you are working for please do. The fact that you are there must mean you have nowhere better to go or that there is no organization that wants you at the moment so why not make the best of where you are?

Stop seeing management as the enemy. The “them” and “us” mentality should stop. It doesn’t matter that your boss is “horrible” or “doesn’t care about employees.” The fact that you are in that organization and getting paid (no matter how much) to conduct specific duties means it is your mandate to perform because you have an obligation to the organization to do so. This is regardless of whatever circumstances might be present at that moment. There is a common saying among us when we have had a busy day at work, “Nhasi ndashanda!!” In English it roughly translates to, “I have worked hard today!” So what does this mean? Isn’t working hard what you are supposed to do everyday? If you don’t work hard everyday, what is it that you do on every other day?

A lot of arguments have been put forward about unavailability of resources, the rough economic times, management style, etcetera, all of which can hinder performance. That is very true but are we as employees putting in an honest day’s work? With that little that we might have to work with, are we honestly giving our best to whatever duties we have been assigned to? The answer most frequently is no. Maybe it is high time in the famous words of Michael Jackson; we take a look at the man in the mirror before we go blaming our employers for our “misfortunes.”

Develop a hunger for knowledge. It is not management’s responsibility to better your knowledge and skills; you can do that on your own. If we ask ourselves when the last time was that we picked up a book that was not a magazine, newspaper or novel just to read on a topic of interest, we would be surprised at the answer. Some of us complain we are bored with our jobs because we have a lot of downtime due to the current economic hardships that a lot of organisations are facing, but what we choose to do with our ‘free” time is a lot of our doing. We have to do way with the mentality that we read only for exams. Being knowledgeable improves our thinking capability and makes us more effective in our work.

Commit to excellence. This covers every area of your life. Adopt a motto of exuding excellence in all you do, what you wear, your work area and what you say. Make it a habit and eventually it will become a way of life. Be excellent even if no one is watching.

The employer will never be able to solve all your needs. This is a sad but true reality. Once we accept this truth we can stop being resentful and start taking control of our lives. Stealing to “fix” the employer for being stingy is not an option. As previously mentioned, “if you are not happy with the heat, get out of the kitchen.”

Change is never easy but if management and employees work together towards a common goal, the results will definitely be worthwhile.

Memory Nguwi is the Managing Consultant of Industrial Psychology Consultants (Pvt) Ltd a management and human resources consulting firm. Phone 481946-48/481950/2900276/2900966 or cell number 0772 356 361 or email: mnguwi@ipcconsultants.com or visit our website at www.ipcconsultants.com

Are Zimbabwean Employees underpaid?

Are Zimbabwean Employees underpaid?

Employers and employers seem to be ignorant on the difference between capacity utilisation, production and productivity.

Link Salaries to Productivity: Government, Employers and Labour Can Work Together

The general feeling is that the above social partners are not working together for the good of the country. The obvious reason is that they have competing interests. However there is more that unite these partners than divide them. Each social partner can contribute to the success of the country if they work together.

The government can play a crucial role in assisting the other two social partners. The major area of conflict between labour and business has been the issue of salaries. Labour wants better remuneration while employers are saying they can’t afford the salaries requested. The bottom line is while labour would want employers to peg salaries to the PDL that model is suicidal. If you pay salaries beyond your means it’s a sure way to bankruptcy. No normal business is able to pay more than what they are producing. The assumption being made by labour is that employers are making a lot of money therefore they should pay. If this is not the assumption, I find no reason why they would push for higher pay when employers are struggling. Its common knowledge that the majority of businesses are struggling and they are doing everything possible to ensure employees do not lose their jobs.

The government can assist labour and business to deal with the salary issues. The government can seriously look at maybe reducing taxes on employee remuneration. This will ensure that the little that employees are receiving can go towards meeting their basic needs. In other countries for example productivity based remuneration or incentives are taxed at half the normal tax on remuneration. This will greatly assist employees to benefit from productivity gains. This will create a win –win situation where the employer benefits and the employees benefit. The government can come up with the legal framework with the assistance of the social partners to enable the effective implementation of such an initiative. Government in the long run will benefit from increased revenue inflows as a result of such an initiative. On the other hand the government will have assisted the other two social partners reduce conflict related to remuneration.

The social partners should desist from setting minimum wages as some people are pushing for. Already we have the mechanism for negotiating for salaries at NEC level and at organisational level. Our economic situation demands that we focus on negotiations taking place at organisational level. These negotiations are closer to reality than those taking place at NEC level. Deliberations at NEC level are not helping both employees and employers. They are abstract negotiations which are far removed from reality.  How do you negotiate at NEC level when the specific industries do not have a single credible statistic on sector specific productivity? Until and unless the social partners come together and start collecting data on productivity NEC negotiations will be killing industries.  How do you prescribe a uniform salary increase to companies with different levels of productivity? Individual companies face different challenges and these must be considered when setting salaries. Until there is credible productivity data the NEC negotiations should just be stopped as they are not helping any of the protagonists. At the moment, more than half of the salary negotiations in more than 40 NECs are deadlocked. These deadlocked negotiations will end up at an arbitrator. Most of the arbitrators have no clue about the reality in industry. They are awarding increases that are contestable because the awards are unreasonable.

It is in the interest of labour to support productivity initiatives. What should be at the top of the agenda for trade unions should be productivity improvement and employment preservation. These are issues that are alien to most trade unions. In order to protect jobs, trade unions should be working together with employers to formulate policies and initiatives that will promote employment creation. Some of the labour unions activists have never been retrenched from their jobs and they do not know the pain that retrenched employees go through. The agenda for trade unions going forward should be employment creation and promoting productivity. With such an agenda both labour and employers will benefit.  Clamouring for a PDL wage when they know that is not possible is a waste of time because no sane employer will ever pay a PDL linked minimum salary with the current level of productivity. When all the social partners promote productivity, time will come when even the stingy employer will find it hard to pay below the PDL. Its total madness to want a PDL linked minimum wage for a country slowly recovering from years of economic decline. Employee representatives must understand one basic negotiation rule; you negotiate for something you know exists. If you are sure your employers has loads of money yes go ahead and demand or negotiate. If you know you employer is broke it’s a waste of time to demand the money that you know is not there. As it is now, the average minimum wage of USD189 is already too high compared to regional economies. How do we expect an economy at the bottom of the pile to afford such a minimum wage? Since dollarisation a lot of employees have lost their jobs through retrenchments. These retrenchments will continue as long as we continue to demand wages above productivity level. The rate at which wages are moving compared to productivity will eventually choke the whole economy resulting in massive job losses. Government, labour and business be warned.  We need to return to the basics.

The above analysis does not absolve employers who are deliberately underpaying their employees when they are doing well. Employers still need to pay a decent wage especially when they are doing well. The other reason why employers are accused by employees of underpaying is that they do not want to disclose their financial performance to employees. As a result employees are suspicious of every move employers take. Full disclosure of the company’s performance will assist employers deal with 90% of the misconceptions employees have about making money.  Business must also make a deliberate effort to educate their employees on how the business makes money. Most employees believe that every customer who comes through the company door is bringing loads of money. They also look at units sold and believe the company has made huge profits. Most employees do not understand that sometimes business are overburdened by loans that need to be repaid and also by costs (staff costs and other operating costs).  The majority of staff do not know that margins have shrinked compared to the pre –dollarisation period.   I believe that the majority of employees are reasonable people who will understand if they are provided with timely information on how the company is performing. Interacting with most workers, the impression I get is that they are in the dark regarding company performance. Critical information on company performance is only released when the company is not doing well, they allege, in order not to reward employees. Employers have the power and obligation to correct this perception and in the process enhance trust between the company and employees.

The only viable remuneration option available for our country is for the social partners to put productivity at the centre of our remuneration policies in both the civil service and in the private sector. The theme for the next 5 years should be “productivity based remuneration”. The modalities of how this can be done will be, subject to discussion by the social partners.

Memory Nguwi is the Managing Consultant of Industrial Psychology Consultants (Pvt) Ltd a management and human resources consulting firm. Phone 481946-48/481950/2900276/2900966 or cell number 0772 356 361 or email: mnguwi@ipcconsultants.com or visit our website at www.ipcconsultants.com

An Organisation is as good as the people it hires

Have you ever wondered why some organisations are perennial underachiever? Regardless of the amount of money poured into these organisations they still fail to perform. Some of them have blamed both the political and economic environment for their failures. The honest truth about these organisations is that they just do not have the right talent to take the organisation to the desired destination or vision.

Look at these organisations and you will discover the following facts; they do not put enough effort in getting the right talent. In some instances the organisation has created such a bad employer brand that not any sober minded person would want to work for them. The root cause of all this is that the board and senior management do not really care about the quality of the individuals joining the organisation. There are no transparent recruitment processes to support the organization’s vision. As a result of this distortion incompetent relatives and friends get jobs and promotions ahead of very talented individuals. Look at any successful organisation right now here in Zimbabwe; you will discover that they make every effort to get the right talent in. It’s a case of garbage in garbage out. Do not expect your organisation to perform wonders if it does not have the right talent. You may have all the material resources as long as you do not have the right talent success will be a pipe dream.

The two key aspects to any successful organisation are; get the right talent and manage that talent well. Look at the teams at the world cup right now. Teams that are progressing in the world cup have taken their time to identify talent and created the environment for the talent to shine. Organisations will not succeed with 3^rd rate talent. Until and unless sober minded senior executives and the board start indentifying the right talent and creating the right environment for this talent to shine success will not come. Equated to football most organisations have players who deserve to be on the substitute bench instead on the field. Some of the employees do not even deserve to be on the bench.

Successful organisations need to have effective systems for getting talent in and making sure that this talent finds opportunities to shine. The other sad development in the corporate world in Zimbabwe is the length of tenure of CEOs. Some of the worst performing companies have CEOs with over 10 years at the helm. The honest truth is that these executives have passed their sell-by date and are blocking exciting talent both within and outside the organisation. This problem starts with board members who have also overstayed. Shareholders must be more vigilant and get rid of the deadwood especially at the executive level.

The major source of all the problems outlined above is how organisations select employees who join them.  A number of organisations waste a lot of time trying to manage wrong employees. If only organisations could take their time to select the right employees half their employee related challenges will be solved.

Talent is the key to success, without it nothing can happen within the company. It is a critical element in creating competitive advantage because it is difficult for other firms to imitate and it is the critical determinant of performance.  Success of any organisation depends on the quality of staff. Peter Drucker suggests that: “Companies will regret 60% of their hiring decisions within 12 months.”  This is because organisations do not want to invest money in the right and best selection methods. Despite the low reliability and validity of the interview method of employee selection it remains very popular. Managers love this system because it can be easily manipulated to suit personal preferences which may damage the organization’s performance in the long term. Managers need to understand that not every employee is talent and it takes a great deal of specialized methods to be able to identify talent. Most of the attributes (90%) that are needed for employees to be successful are not visible in an interview. The interview can only assist you to identify (10%) of the attributes needed for successful job performance.

The interview methods need to be supported by such selection methods as psychometric assessments. I quick look at some of the companies that have performed consistently during the hyperinflation and the multicurrency period revealed that 85% of these companies use psychometric tests for employee selection. Some of the worst performing companies do not even want to hear about psychometric assessment because it will put a stop to the hiring of incompetent friends and relatives. Shareholders must make a choice between staffing their organisations with dead wood and getting the right talent that will make a huge impact the moment they join the organisation. Taking employees into your organisation without going through psychometric assessment is like buying shoes with a “no returns” label without trying them. Should there be a problem later you have to live with the consequences.

It takes a great deal of effort and resources to manage out non performing employees in Zimbabwe. Organisations can save a lot of money by paying attention to the people who join the organisation. 

Memory Nguwi is the Managing Consultant of Industrial Psychology Consultants (Pvt) Ltd a management and human resources consulting firm. Phone 481946-48/481950/2900276/2900966 or cell number 0772 356 361 or email: mnguwi@ipcconsultants.com or visit our website at www.ipcconsultants.com