Performance-pay: Could it work for you?

Performance-based pay for executives is commonplace in leading companies, but few have implemented performance incentives across their broader workforce.

Telecommunications company, Telstra, is bucking the trend. Telstra is negotiating to introduce performance-based pay for 20,000 of its workforce, according to a report in The Australian Financial Review today. Telstra employs 30,203 full-time employees and 9,769 part-timers. The incentive payments are between 3% and 3.5% per year of the three-year agreement.

The proposal is part of Telstra’s current enterprise negotiations covering both union and non-union collective agreements, according to the report, and is part of a complex deal designed to bring the pay for the two groups together, and to reduce redundancy payments. The plan has been endorsed by one of the unions involved – the Communications Electrical and Plumbers Union – but the other union with coverage – the Community and Public Sector Union – has raised concerns, and not recommended the deal.

Unions are traditionally resistant to performance-based pay, according to executive remuneration expert, Michael Robinson, of Guerdon Associates. “Most employees under awards don’t receive performance-based pay,” he says.  LeadingCompany rang both the CEPU and the CPSU for comment, but neither was able to respond before the publication deadline.

Performance pay is a powerful way to change behaviour, according to Martin Nally, managing director of hranywhere. “It drives the right behaviour. You want people to focus on business outcomes.”

But Margaret Harrison, managing director of Our HR Company, sounds a warning that performance-pay can easily be seen as unfair. “Under the current regime, it is not necessarily a wise thing to get into.”

There are some key elements to make performance-based pay an effective productivity tool for Telstra, and for any other leading company contemplating the idea.

Exceptionally good role clarity

Anyone on a performance-based pay system must be clear about their role, what is involved and what is not involved, and what elements they control. Concerns over performance-based pay have centred over setting realistic goals for elements that employee can control. Nally says this is always possible: “Everyone can have objectives over what they can control,” he says.

Clear key performance indicators

To make KPIs clear and creative an effective system, Nally says they must be SMART:

• Specific
• Measurable
• Achievable
• Relevant
• Timely

Incentives should reward performance that is above and beyond the day to day role – stretch targets.

Reward methods

Harrison says incentive rewards that are team-based or company-wide, rather than individual, can reduce the risk of employees feeling the system is unfair. “That seems like the fairest thing,” she says. “It reduces the chance of some saying, ‘That is not fair, it is bullying, why didn’t I get it?’”

The CPSU’s president, Michael Tull, says there is dissatisfaction with Telstra’s current performance pay system because staff can get positive assessments without getting a pay rise, according to the AFR report.

Business goals

Only companies that are very clear about their own goals can set effective performance pay systems, Nally says. “This kind of system is really funded because if people achieve their results, the organisation will prosper.” Without clear links between performance pay and business outcomes, stumping up the extra money could end up eroding the company’s financial results.

Terminology

Use the word incentive rather than bonus, says Nally, who abhors the word. “I am not being semantic here. With bonuses there is a sense of entitlement, whereas with incentives, staff link it to measurable outcomes controlled by the individual.”

A tool for engagement

“Authorship builds ownership,” says Nally. “If leaders set objectives for his team, they will remain the leader’s objectives. But if leaders engage employees in setting their own goals, that builds engagement.”

Nally says: “That is the crucial piece of the system.”