How Do I Get Sustained Performance from My Key People?
True or False?
Please take a moment to read the following statements and consider in your own mind whether they are true or false. Then explore the commentary that follows to see if your first reaction accounted for all of the issues.
Sustained performance is a good thing.
True, right? Well maybe not. What if the performance is poor? Would you want to sustain it then? We want great performance to be sustained and replace poor results. But we certainly don't want to perpetuate mediocrity or non-performance. Although this seems obvious, many companies have actually become pretty good at sustaining and perpetuating poor performance - and are even rewarding people for it.
Reducing turnover among your employees will save money over the long run.
This would also seem to be logical and true, would it not? Well in many cases yes, but in some cases no. What if you don't have the right employees? In his book, Good to Great, author Jim Collins makes the point that companies that have sustained, exponential high performance begin with having the right people "on the bus." If you don't have the right people, you don't want to reduce turnover. You only want to retain great people. Retaining bad or mediocre talent is more expensive that bringing in great talent.
Presenting a compelling future is crucial to the retention of talented people.
Given our analysis of the previous statement, we would have to conclude that this statement is true. In fact, your ability to paint a compelling picture of the future will be one of the ways you will attract great people to your company. And once they come, if they are the right people, they will make the future company even bigger and greater than you had originally envisioned.
The best compensation device for employee retention is a long-term incentive plan.
At VisionLink, we would say that this is also true. It goes hand in hand with a compelling future. If compensation is one of the ways we communicate what's important to our employees, we should always have a rewards strategy that parallels our long-term business plan. A long-term incentive plan is the most common ingredient in most company's compensation portfolio. If a great employee is going to "invest" his talent in building a future company, he will want to know how he will be rewarded for doing so. In some ways, if an employee does not relate to this concept, he could very well not be a truly "key" person.
Everyone agrees that incentive plans work.
Well, that probably depends on what the meaning of the word "work" is in this context. Many would argue that incentive plans don't impact performance or behavior. We would actually agree with that in some instances. If an employee isn't compelled by the company's future, if he or she does not work in a positive environment, if there is no true opportunity for personal or professional growth, if there is no performance management, and/or if the person doesn't have a good work ethic or compatible value system, then a great incentive plan is not going to make a difference.
However, the converse is also true. If an individual experiences all of those other things, but does not see a relationship between his or her contributions and the rewards received, sooner or later they are likely to secure a position elsewhere. They will seek employment at a place that considers financial rewards an important part of its value proposition and is operating under a pay for performance philosophy.
In short, having a value proposition that is a competitive advantage requires that all elements of a total rewards framework be built, not just some.
Sustained Optimal Performance
So, when we seek to answer the question, "how do I get sustained performance from my key people," what we are really talking about is a consistent perpetuation of optimal results - not just any results. In this context, sustained optimal performance might best be described in these terms:
- Top line growth
- Bottom line growth
- Proper return on equity
To realize such outcomes, great companies do two things. First, they secure the right talent. Second, they nurture the right outlook and attitude.
With regard to the right talent, it is instructive to consider the point Jim Collins makes in his seminal work, Good to Great.
"The right people don't need to be tightly managed or fired up; they will be self motivated by the inner drive to produce the best results and to be part of creating something great...If you have the wrong people, it doesn't matter whether you discover the right direction; you still won't have a great company. Great vision without great people is irrelevant."
Outlook and attitude, then, are critical elements associated with sustained optimal performance. If so, how are such qualities manifest? What qualities do those with high performance capabilities and potential consistently exhibit?
Five qualities are essential in this regard.
These individuals think in terms of progress, growth, contribution and value creation. They are compelled by tomorrow's opportunities - both for the organization and for themselves. As a result, they can envision what their role is in the future of the organization and are willing to invest their unique ability in its fulfillment. They understand the concept of value creation and recognize that value is only rewarded when value has been created.
It is difficult to find a high performer that is a committed pessimist. There is an optimism that guides and informs the thought process of those that a company should want to attract into its ranks. That positive thought process is neither a naive acceptance pattern nor a blind commitment to organizational leadership. To the contrary, the belief in the future these individuals possess is based on a clear understanding of where the business is going, what it will take to get there and how they can contribute to it. It is a reflection of their confidence in their own ability as well as that of the organization.
High performance individuals are not passive. They make things happen, they figure things out, they assume accountability, they take control. To us a basketball analogy, these individuals are those that want the ball in the final 15 seconds of a close basketball game. They know what needs to be done to get the ball in the basket.
There is a sense of urgency about those that perform at a high level. Because they see the possibilities, they are even a bit impatient until they are fulfilled. In this sense, peak performers think like owners do. In fact, they mirror owners in the sense they have adopted a stewardship approach to their responsibilities and own the results (or lack thereof) they produce.
Most businesses do not succeed because of an individual. That's why we refer to them as "organizations." They are made up of a collection of individuals that operate in a "promise-based" environment. Each individual's ability to perform depends upon others delivering on what they are supposed to do - all in support of the brand promise. As a result, individuals need to know not only how to work in teams but how to make those around them better than they could be on their own. In doing so, the whole becomes greater than the sum of its parts.
Companies that are seeking to sustain optimal performance must start with people that are made up of these kinds of qualities.
With the right people in place, a company can turn its attention to a view of the optimal future company. Logically, this is the product of sustained optimal performance. At the start, the future company is a purely hypothetical vision - on that exists only in minds of those that can conceive of it.
That said, the truth is that high performance companies proceed toward that future vision as though it is a present reality. They envision an organization in which there is maximum output/productivity of all human and financial capital. In that future optimal performance company there is "perfect" execution of the business plan.
So how close can business actually come to fulfilling this description? That's hard to answer and the response is different for each organization. However, what every company can do is focus on those areas over which they have control and ensure that they are managing to the best possible result in each area. Among the things a business can control in relation to its drive toward optimal performance and the fulfillment of the future company are the following:
- It can hire the best talent possible
- It can have a well-defined and consistently communicated/executed business strategy
- It can define and communicate roles and expectations
- It can promote and reward excellent day to day and sustained execution
- Ownership can commit to optimal ideals and make the appropriate sacrifices to ensure optimal outcomes
Retention Plus Sustained Performance?
In our true/false quick at the beginning of this article, we mused about whether retention and sustained performance were good or bad. The conclusion was that each of these can be considered good if we were talking about great people achieving optimal performance. So, the question is, can a company both retain great people and sustain optimal performance? If so, how?
The road to this outcome begins with a proper understanding of what compels a high performing employee to first join and then remain with an organization. Essentially, there are four components to this equation.
The Employee Sees a Compelling Future
This means not only that the employee understands what the company defines itself to be in future terms, but that he sees himself as part of it. There is, a result, a shared vision. This happens only if there is a shared value system and if the mission of the organization is compatible with the purposes and perspectives of the employee. Finally, this means that employees see that the value proposition of the organizations can best be fulfilled by a unique team that includes their unique abilities.
The Employee Experiences a Positive Work Environment
High performance companies nurture a culture of openness, trust, confidence and positive energy. Employees feel good about who they work with, the nature of the work they have to do and the resources they have available to them to meet the expectations associated with their roles. The company has also fostered processes for open communication, problem solving and creative exchange. Employees feel "safe" in their ability to make mistakes as they strive for superior performance.
The Employee Sees Opportunities for Growth and Challenge
If an individual has a unique ability when he joins an organization, he will stay there if he sees that his capabilities will be appreciated, enhanced and expanded through his involvement. This means that organizations hoping for peak performance must seek to understand the unique capabilities of their people and align them with the stewardships they apply to various roles. In addition, they must create opportunities for that talent to be magnified and expanded.
The Employee Believes in the Value of the Rewards
Rewards are not the be all and end all of motivation for key employees. However, employees of the caliber we are discussing in this article want to help the company achieve its targeted results because the financial rewards for them personally are meaningful. They anticipate participating in the growth they help create.
Framed another way, a company seeks to drive certain financial outcomes in building its future company. Does it want to rely on the performance of an employee who is disinterested in what those results mean to him personally? How likely is there to be a unified financial vision for growing the business if only one of the parties is compelled by financial outcomes?
So what financial outcomes do key employees seek? Essentially, they seek to fulfill three things.
- Cash Flow/Standard of Living - this is typically addressed through salary and short term incentives
- Security for Self & Family - this is fulfilled through an adequate if not comprehensive benefit plan
- Wealth Accumulation - this typically has two components to it; one is retirement funding and the other is opportunities to participate in the company growth they help create. Retirement funding is usually taken care of through some type of retirement plan such as a 401(k). Participation in company growth usually occurs by participating in a long-term incentive plan such as a profit pool, phantom equity, performance units or stock.
These four issues, when addressed properly, make up what can be considered the total rewards value proposition that an employer offers his employees. If any one of these areas is not properly addressed, an employee will often decline an offer from a company or, if he is employed, leave the organization.
Conversely, when these issues are properly aligned, employees gain confidence in themselves and the business. Such an approach grants them a kind of permission to unleash their passion and invest themselves in the betterment of the company. This kind of environment breeds an ownership mentality.
The Role of Compensation in Achieving Sustained Optimal Performance
In considering the subject of sustained performance, it is important to examine the role of compensation and where financial rewards fit in. In a pay for performance environment, some measure of an employee's total compensation is going to be incentive based. In fact, in high performance companies, a significant percentage of a person's total earnings potential comes from variable pay.
Incentives work in an organization when they are engineered properly and are effectively aligned with the business strategy of the organization. In this context, they are only effective if they communicate, reinforce and inspire.
Some companies' incentives are not well thought out and are not properly aligned with strategic purposes, roles and expectations. As a result, they come across as coercive. They end up obscuring the real outcomes that are sought and create misalignment. This happens for a variety of reasons. Sometimes it's because different programs have been promised to different people at different points in time. Other times there is an over emphasis on short term rewards when long-term results are needed. And so on.
Ultimately, when properly engineered, incentive plans should help create greater line of sight in an organization. Line of sight occurs when there is alignment between the following elements.
- Company vision
- Company strategy
- Roles and Expectations
- Employee vision
Alignment occurs when an employee understands and can articulate the relationship between these interdependent components of line of sight. Sustained performance in a company comes when all key people have a consistent understanding of these elements.
Rewards, then, should run on a parallel track with the business plan of the organization. Rewards should create a laser beam focus on the performance factors the business needs fulfilled. That focus should lead to greater execution on the part of key people. Sustained execution leads to sustained success. Repeated success creates a culture of confidence and sustained optimal performance becomes the norm.
When an appropriate and effective rewards framework has been built within an organization, an employer can confidently say to his employee "here is our business plan...and here is your compensation plan. They work together." When that happens the right way, the employee's mindset should be as follows.
Balancing Short and Long-Term Incentives
Incentive plans are typically divided between those with payout periods of one year or less (short-term incentives) and those with payout periods beyond one year (long-term incentives). Each speaks to different priorities and should create a different focus.
What occurs in most businesses is that they create targets for future growth, but they don't communicate those targets in they way they pay people. Said another way, in most organizations, there is too much emphasis on short-term incentives and not enough on long-term. As a result, employees have no financial reason to think like an owner about issues such as sustained profitability, long-term value creation, customer relationship building, waste management, team building and so on.
Although some organizations may differ, in general terms about half of an executive management employee's incentive compensation should be short-term and the other half long-term. (Some will transition to this over a period of two to three years - starting out perhaps with a 70/30 blend, then 60/40 and ultimately 50/50.)
It is important to realize that HOW you pay people communicates much more to them than WHAT or HOW MUCH you pay them. Compensation is an investment that is expected to generate a positive return. The more you put at risk, the greater the return it should generate. And just like market investments, a portfolio must be made up of a variety of asset classes to ensure a sustained return and to equalize risk. Likewise, a compensation "portfolio" must be organized to target the overall results (return) that the company seeks to achieve.
With this understanding as a foundation, companies should look at short-term incentives as rewarding the execution of those initiatives that will impact and sustain the business now - today, tomorrow, this year. Certainly, such a focus will impact both the short-term and long-term value of the organization.
Long-term incentives, on the other hand, should communicate the need the company has to sustain that execution and performance over an extended period of time. As a result, it should guide employees towards certain behaviors and away from others. For example, such an incentive plan should help employees see that the company is not interested in short-term profits at the expense of the long-term relationship with the customer. Otherwise, they are eroding their ability to sustain that profitability and growth into the future - because somewhere down the road a bitter rather than sweet harvest will be realized. A long-term incentive helps to promote "good" profits rather than "bad" profits.
Long-Term Incentive Plan Decision Tree
In implementing a long-term approach towards compensation design, a number of decisions will need to be made about what plan or combination of plans is right for your company. This can be a daunting task if one is not guided through the maze of choices.
Ultimately, there are about nine different long-term incentive plans to chose from - each of which has its own subsets. To arrive at which is the bet fit or your organization, a series of questions need to be posed. The answers to those questions will lead to or away from certain solutions. For example, do you want to share equity or do you not want to share equity? If yes, do you want to award full value shares or appreciation only? And so on.
To help our clients in this process, VisionLink has developed something called the Long-Term Incentive Plan Decision Tree. It appears below. This tool or one like it can help a company understand the combination of issues that should be considered in making a decision about how it will reward employees for long-term performance.
There are obviously a number of other factors to look at as you consider implementation of a long-term plan. What will the earnings impact be? How will we track values? What vesting schedule should be applied? What should the size of the awards be? How will this impact the company's cash flow? How much liquidity is or should be associated with this kind of plan? And so forth.
Because of the critical nature of these kinds of rewards strategies and their potential impact, most companies secure outside help to sort through the options and build out their plan. These kinds of strategies require proper conceptualization, blueprinting, modeling, documentation and explanation. Certainly, this is a large area of focus for VisionLink when it is engaged to assist its clients.
Entrepreneurial employees might be the best nomenclature to describe the kind of talent that will help an organization achieve sustained optimal results. Such individuals have confidence in their personal intellectual property. They are willing to "invest" (take a risk) in anticipation of a long-term reward. As a result, they are more flexible about guarantees and are open to considering what upside potential might emerge from their contributions to the organization. These kinds of people are willing to sacrifice short-term gain for long-term rewards.
Perhaps the best way to capture the imagination of employees so inclined is to frame your total rewards value proposition in a value statement. Below is an example of what this might look like. Just imagine the impact such a value statement can have on your ability to tell a story about the vision of the company, the business plan that's in place to secure its fulfillment and what it will all mean to an employee if he commits his time and talent to the roles, expectations and stewardships you have in mind for him.
VisionLink helps companies examine this by computing something called a Net Ownership Score (NOS). This survey and scoring system measures four employee responses: understanding, importance, contribution and connection. Employees rate themselves on a scale of 1 to 10 on a series of statements that relate to those four components. Scores are compiled and placed in three categories - clear, unsure and not clear. The highest average ranking is then subtracted from the lowest to arrive at the "net score."
Such a study can assist a company in determining where it stands right now relative to the ownership mentality issue. Whether one performs this kind of study or does something else, is not as important as the business realizing this is a matter that can't be ignored if the company is going to experience breakthrough growth.
Hopefully, as a result of this summary, you have been able to draw the following conclusions about sustained optimal performance.
- Sustained optimal performance results from the tight linkage of (a) a compelling future, (b) right fit talent, and (c) strong upside rewards programs
- To be effective, incentive plans must (a) communicate, (b) reinforce, and (c) inspire
- The biggest mistake made in most companies' rewards program is the lack of a strong, long-term incentive plan