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Careers: Paying For Performance Vs. Large Base Salaries
By Bert Sadtler, Senior Contributor


Companies today must re-assess their talent needs in order to ensure they remain competitive and drive growth. 

The satellite communications industry faces challenges but remains ripe with opportunities. Great talent can make a huge impact. Employers need to get it right and make a “great hire.” 

To assist with career and leadership issues, SatMagazine asked Bert Sadtler of Boxwood Advisors and Executive Search (www.BoxwoodSearch.com) to provide his insight to our readers.

We continue to see changes and transitions in business. One of the transitions is the migration from a salary based compensation model to a salary plus performance bonus compensation model. 

Driving this migration are business forces that require more accountability and require measurable results. To encourage employees to make the extra effort and achieve results with a sense of urgency, pay for performance models are replacing the salary based compensation model. While there is a capitalistic component to paying for performance, such may have significant value tothe marketplace. 

Isn’t pay for performance really a good thing as an alternative to the large base salary for both the business and the employee? What’s the alternative? The alternative is called “Large Base Salary.”

What’s wrong with the alternative? There is plenty wrong today with a “Large Base Salary.”

• Starting a new job with a large base salary sets up a new hire carrying a high cost for the company, without delivering any measurable value. If leadership determines that compensation cuts need to be made, the new hire becomes the first one to go, without ever having a chance to deliver any value to the business.

• The large base salary served a previous business model when employees joined a business for a 20- to 30-year career. Productivity could be measured over a longer timeframe and could be rewarded with a merit pay increase.

With the large base salary model falling no longer being a practical model, we are compelled to develop a more productive approach. There are, obviously, several schools of thought. What is common to today’s approach is a simple paradigm. Businesses want value. Businesses want to receive something in return for their compensation. Businesses want to pay for the performance of their employees. Business do not wish to pay for employees who offer little or no performance. Businesses want their employees to perform for their compensation. Not all pay for performance programs are equal. The best ones include: 

• The goals to be accomplished aligned with the goals of the company

• If the goals are reached, the employee’s manager has reached his or her goals as well

• The goals are clearly defined and ideally are the result of being developed through a collaborative effort between employee and manager

• The program and goals are simple for the employee to understand

• Once attained, the employee knows what bonus will be earned—and when

• The employee knows that when his or her goals are met the bonuses are paid. At the same time, if goals are not met, bonuses are not received, as they have not been earned

In some cases, announcing a new pay for performance program without full evaluation can encourage unfavorable behavior.

As one example of a recently announced pay for performance program, a Washington DC Area, Tier-1 government contractor has announced the implementation of “The Bell Curve” bonus program. You may remember the bell curve from elementary school. Your teacher determined that the results from a test revealed that the test was too hard and everyone in the class failed. The teacher then assigned an A to the student who scored the highest grade. The majority of the students would then received B and C scores and the lowest score in the class received an F. For elementary school, this may have been a decent approach.

Here are two obvious flaws that are endemic of the bell curve for a bonus compensation program:

• If the team of employees being reviewed consists of all under achievers and under performers, some of them will receive an excellent rating.

• If the team of employees being reviewed consists of over-achieving, over performers, some of them will receive a poor or failing score.

Clearly the business community has some work ahead if the bell curve is being considered as a bonus compensation model today.

As for a Best Practices Approach, paying for performance should have no limitations. Encouraging employees to deliver incredible value should offer incredible rewards. Excellence is not limited to a predefined percentage of employees. Under performing employees should not be rewarded. All employees should be eligible for significant bonus rewards if they have each delivered incredible value.

Implementing this type of performance-based bonus compensation plan requires structure and each employee’s involvement. Some businesses would regard this investment in time as unproductive and time consuming. We would counter with: How unproductive is rewarding under-achieving employees with a high rating and significant bonus if the evaluation program is weak?

I have found the MBO (Manage by Objectives) model to work well for Pay for Performance bonus compensation. Similar to the bell curve, MBOs have been used as business models for years. The idea is not innovative. MBOs are designed to pay employees who perform and incentivize employees to perform to be paid. Implementing the MBO bonus compensation model requires that senior leadership understand the way forward and comprehend the specific responsibilities of each internal business group in order for the business to reach it’s goals.

Every business, to be successful, must generate more revenue than what is being spent. While it would be ideal to pay employees a bonus when the business achieves financial success, in reality, not every employee has direct visibility and direct accountability to the financial success of the business. Assuming there is proper alignment, if each employee excels in their respective role, the business can be expected to be successful.

The Pay for Performance MBO model works with small, medium and large businesses. Through a collaborative effort, employees and their manager develop four to six critical goals that must be completed within the next six months. The manager then assigns a range of bonus amounts to each of the goals. Higher priorities are assigned a higher bonus amount.

At the close of the six or 12 month cycle, measurements are taken against the goals, a bonus award is calculated and paid. Then, a new six or 12 month cycle begins with either new objectives or a continuation of the previous goals. Additionally, it is understood that an additional discretionary bonus exists for extraordinary accomplishments—this communicates to employees that there is no cap, or limit, to rewards and there should be no cap or limit for extraordinary efforts.

Today’s marketplace seeks value. Large base salaries are viewed more as an expense and less as a value to a business. Paying for performance speaks about value. Rewarding for results speaks about value. Collaboration between employee and manager toward the development of goals results in a mutual investment in achieving the goals. This delivers value to the business with employee accountability as well as pay for performance. 

How much is the large base salary or ineffective bonus program costing your business?

Good hunting.

About the author
Bert Sadtler frequently is invited to speak and further discuss the shift in the employer’s performance based compensation model as well as the shift in the recruitment paradigm toward acquiring critical senior level talent. Bert may be reached at: BertSadtler@BoxwoodSearch.com.

About Boxwood Search
Boxwood provides solutions for businesses seeking growth and is a management, consulting-recruiting firm with offices in The Greater Washington DC Region and The Tampa Bay, Florida, Region. As a dedicated, consulting resource to the employer, Boxwood develops strategy for organizational growth through the evaluation and acquisition of critical talent. Market sectors include: SATCOM, Government Contracting, Communications and Technology.