Pay for Performance

The question of how to motivate employees to perform their functions in a manner that supports the firm’s overall goals and objectives really is the “Golden Ticket” of business.  In my career, I’ve observed and experienced many different “schemes” that were developed to maximize the performance of the firm, none of which have really worked.  Usually, the Leadership establishes goals that aren’t terribly realistic, referring to them as “stretch goals”.  The managers that are tasked with achieving these goals now must – with straight faces – cascade these goals down to their subordinates promising them that achieving these goals will result in annual bonuses.  Since these subordinates are usually bright enough to recognize that these goals can not be achieved under normal circumstances, they begin to “conspire” with their management to look for ways to cut corners or take short cuts as a means to achieving the goals. This act of conspiring is actually one of the benefits of “pay for performance” because it actually forces people everyone to get together and think of creative ways to solve the problems and achieve the goals.  Unfortunately, this is a process that should have taken place before the goals were established!

Since these goals usually involve thresholds for end of the year revenue, inventory and operating free cash flow (OFCF), the organization usually finds itself starting the fourth quarter behind the pace to achieve tits end of the year goals.  This creates a frenzy of brainstorming which usually involves extreme measures to increase revenue, reduce inventory and cut spending to the bone, which is a very inefficient use of organizational resources.  If the organizational leadership just gave realistic expectations – not easy, just realistic – and challenged everyone to be more collaborative and creative on a daily basis rather than just for 90 days at the end of the year, efficiencies and assets utilization would be maximized and the long-term future of the organization would be strengthened and more secure, which would result in a more confident, productive and secure workforce.

Reference

Froeb, L., McCann, B., Shot, M. and Ward, M. (2016). Managerial economics: a problem solving approach. Boston, MA. Cengage Learning.