How do you design a pay-for-performance goal system that inspires people to do amazing things?
I often find myself torn between two distinct approaches:
- Goals should be things that you need to accomplish to be successful in your job.
- Goals should be things that are above and beyond the normal duties of your job.
The first approach looks at bonus money as part of a total compensation plan. The focus is on doing things that make you great at your job.
The second approach looks at bonus money as something you earn for exceedingly great performance
Which of the two is the best approach? I don’t know, and I’d really like to hear your thoughts on it.
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In my experience there isn’t a right way or a wrong way to do it. It’s all a matter of what fits the needs of your company. However, I prefer to have both competencies and goals be the measure of success for employees. Competencies measure the everyday responsibilities of employees whereas goals measure both the above and beyond achievements of an employee, but also includes competency improvements. It’s all about the company and their process.
It seems to me it depends on whether you subscribe to theory x or theory y, based on the analysis done by Douglas McGregor at MIT. If you give bonuses for doing the assigned job, then you have a culture where you believe employees only do what is coerced out of them and you feel that innovation is unlikely or undesirable. If you give bonuses for doing extraordinary things, then you are encouraging extraordinary things, but trying to regiment quarterly innovations is also shown to be unrealistic. Numerous studies have shown that unexpected bonuses given regularly for extraordinary work leads to extraordinary efforts. Goals should be set, but bonuses should never be paid for simply meeting goals, instead, bonuses should be paid for exceeding goals. The downside to this is that there must be leaders within the ranks of management to create the right culture for innovation and who are able to craft appropriate rewards on a case by case basis. Sometimes an extra day or two of vacation and tickets to a family/couple focused event is more appreciated than a check with no time to spend it.
@Yeelder – Thanks for the interesting perspective. I think your comment about individualized rewards is a really good one – different people value different things. Having managers who understand what motivates their people is essential!