Three-bucket approach links pay to performance
It doesn’t take long to recognise an employee with too many goals in the performance review system.
This employee, the one with the frown and the furrowed brow, is working at the moment on a goal that’s weighted as 5% of his or her responsibilities, and will be performing unrelated activities every day in a week because the employee is being judged on a total of 12 performance objectives.
August Aquila, a consultant who specialises in designing compensation plans, said employees should be given three to five goals or performance objectives. The extent to which those goals are accomplished should determine an employee’s bonus compensation, Aquila said.
“When people have ten goals or 15 goals, it’s too much,” Aquila said. “And goals that are 5% of something dilute the emphasis of what you’re trying to do.”
Aquila, a co-author of multiple books on managing professional services firms – including the recently published Performance Is Everything: The Why, What, and How of Designing Compensation Plans – advocates a three-bucket approach to performance goal-setting that starts with linking employees’ performance to the strategic plan.
A recent Deloitte global study shows that an employer’s ability to execute strategy is a key factor in employee retention. Aquila said every employee should know how his or her role supports the firm in what it is trying to achieve.
With strategy established, creating performance categories that align with strategy is necessary. Aquila and co-author Coral Rice wrote that the buckets typically include:
Economic or financial performance.
Growth and learning, and talent development.
Aquila said any individual should have goals within no more than three of those buckets, with the total number of goals not to exceed five. And the employee’s achievement of those goals would determine the extent to which he or she is entitled to bonus compensation.
Linking pay to performance
Aquila said sports analogies show why some employees should be rewarded more handsomely than others. A soccer striker who leads his league in goals gets a better contract than a striker who scores less often. From Franz Beckenbauer to David Beckham, the best players through the years have been rewarded with the most lucrative pay, and rightly so.
A good, performance-based compensation system motivates and rewards productive behaviour, results and outcomes, Aquila said. With regard to accounting and professional services firms, Aquila said, those whose performance is superior receive more of the bonus allocation than those with less stellar production. He said employees’ base salary should not be subject to performance-based incentives.
“That would create … a number of silos, and your interests and my interests would be really in maximising our individual compensation rather than maximising the compensation of the organisation for which we work,” Aquila said.
Aquila’s most recent book cautions that a minimum profit target should be met before any incentives are paid. The book suggests creating a document to describe the details of the performance compensation plan. Aquila said owners should be evaluated and have bonuses allocated accordingly, too. This is an area where practice often does not match best practices.
Ninety per cent of respondents in a performance management and compensation survey Aquila and his co-author conducted with the help of the AICPA Private Companies Practice Section said owners should have some manner of written goals. But 68% of respondents answered “no” when asked if each owner at their firm has written goals.
Owners are sometimes reluctant to be held accountable or hesitant to spend valuable time documenting written strategies and performance management policies, Aquila said.
“Leaders say, ‘We don’t have the time to do this.’ ” Aquila said. “But really, you don’t have the time not to do this. You really need to do these things, because if you’re going to lead the practice, that’s what it’s all about. It’s not just signing the checkbook or being the administrative person. It’s really being the leader in the practice.”
Some employees will leave a business when it implements performance-based compensation, Aquila said. He said some who depart – but not all – will be underperformers. But he said, ultimately, a performance-based system treats everybody equally because it gives all employees an opportunity to achieve and be compensated for their accomplishments.
“We’re talking about a culture where an organisation identifies what it wants to achieve,” Aquila said. “… At the end of the day, the performers are rewarded.”
—Ken Tysiac (email@example.com) is a CGMA Magazine senior editor.