Ensuring That Your Reward And Performance Management Systems Do Not Create Compensatory Damages

Brian Gagan

Brian is a Leadership Strategies, LLC partner and holds management and human resources degrees from the University of Maine and Syracuse University. He has lived throughout America and in Europe and his background includes large business unit management experience and more than twenty years in the human resources arena. He maintains an active role with several Board appointments and he has worked with companies in nearly all business sectors, large and small, domestic and international. He has held executive and officer positions with The Maine Medical Center, Burger King Corporation, The Pepsi-Cola Company, and Blockbuster Entertainment Corporation. Some of Brian’s primary areas of specialty are mergers and acquisitions, elimination of organized labor influences, organizational structuring, senior executive performance improvement, board functionality, international expansion, executive compensation and perquisite design having a direct effect on organizational financial performance improvement, and peaceful elimination of human capital performance roadblocks.

View all articles by Brian Gagan

Some of the easiest ways to tell whether "compensatory damage" is occurring within an organization are through the following symptoms, among others:

· Performance management and appraisal systems in use are heavily or exclusively subjective in design instead of objective in design.

· Single-rater feedback (boss to subordinate) is the methodology of performance appraisal instead of multi-rater feedback.

· Performance management systems in use are not specifically designed for the market or industry within which the organization operates.

· Variable pay is absent at any of the employment levels within the organization. In other words employees' pay is not directly tied, in any way, to organizational or team performance and results.

· The organization is heavily influenced by union(s), cost of living allowances, or across-the-board compensation adjustments.

· There is more than a 230% variance in total compensation between any management or executive employees who work closely together, or between any non-management employees who work closely together, with or without a reporting relationship. An example of this is the difference between a flight attendant's compensation ($33,000) and a pilot's compensation ($245,000), a 742% variance, or the difference between a company President’s compensation ($280,000) and a company Chairman's compensation ($725,000), a 259% variance.

· There are more than two differing reward system factors between any employees who work closely together, with or without a reporting relationship. An example of this is the case where one employee receives a base salary, company vehicle, cash incentive, stock options and an annual trip to Hawaii, and the other employee receives a base salary and cash incentive only.

· Base wage or salary labor market competitive position philosophies vary within the organization according to level or function.

· Certain employees are paid on a single dimension "incremental" basis while other employees, at any level are paid a base wage or salary only. The most common occurrence of this situation is when an organization pays incentives to sales people based exclusively on transaction amounts (commission) while not paying incentives to other employees for their activities or results.

· There are exceptionally large (greater than one times base salary) cash value awards provided to certain employees, based on "assumptive" performance and results relationships, while other employees receive no awards under the same system. The most common "assumptive" rewards are stock options and discretionary incentives.

Whenever the above situations exist within an organization, the organization's financial performance is being negatively affected in significant ways. This is not to say that there cannot be significant differences within an organization as to how much various contributors are rewarded. There should, in fact, be significant differences based on performance and immutable contribution to results. However, if reward systems within a given organization are universal and remarkably similar in structure (not necessarily in amount) that organization will consistently outperform other organizations that are committed to inefficient reward systems and organizational misalignment.

Our concept of stranded, or wasted, compensation is a natural by-product of the above situations. So is limited organizational productivity and performance.