Jeffrey Saltzman's Blog

Enhancing Organizational Performance

Guidelines for Successfully Linking Employee Engagement Scores to Management Compensation Incentives

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A group of us, with a great deal of experience at this task, got together and pooled our collective knowledge of linking employee survey results, such as an index of employee engagement or other index scores (e.g. safety, customer service culture, organization effectiveness, innovation, turnover, risk-taking, customer satisfaction) to management incentive compensation systems.

Some organizations feel that the way to have maximal impact on “moving the dial” on critical measures of organizational performance is to put your money where your mouth is and to link the performance on these indices to a manager’s compensation. Now, there are about as many ways to perform that linkage as there are organizations out there, but when we compared notes as a group, certain characteristics and guidelines of systems that are deemed more successful seemed to consistently rise to the surface. Here is a listing of the guidelines that we came up with and that have proven successful in a great many organizations.

Overall Guidelines

  • Transparent:
    • Be open and clear about what is being done and how.
    • Avoid a “black-box” mentality. The calculation of the scores should be transparent and easily understood to all of those affected by the system.
  • Require Visible Leadership Support:
    • Leaders should encourage employees to participate in data collection,
    • Hold managers accountable for sharing results with employees and action planning,
    • With assistance as needed, leaders create plans for using survey results within their area of responsibility,
    • Create and cascade high level action plans,
    • Have regular feedback to staff on activities related to objectives.
  • Make the Effort Substantial and Relevant:
    • Rigorous survey and process design,
    • Ongoing validation through rigorous research of the instrument, demonstrating why it matters (e.g. linking index scores to business metrics),
    • Commit to continue the survey program on a regular basis.  Any performance goal or incentive program works best when consistently applied over a longer period.  Managers and employees begin to understand what types of efforts lead to success. This understanding is critical for the program to effectively motivate and reward improving the work environment.  The commitment to continue should include plans to re-administer the survey and the goal or incentive program on a regular basis.
    • Ensure that the managers who are affected by the performance goal or incentive program have the ability (including time, budget, and other resources) to make real improvements on areas identified as the priorities.
  • Have a Transition Period:
    • A “dry run” period where everyone gets comfortable with the process, the calculations and what is being incented, as well as what has to happen to achieve incented goals.
    • The “formula” for the linkage should be communicated well in advance.  As with any incentive or performance management system, expectations should be communicated well enough in advance so that managers have a chance to react and do not feel the “rules have changed” in midstream.
  • Provide for Mid-Cycle Corrections:
    • Providing feedback mid-way through the cycle so managers are not surprised by year-end achievements or failures. Provides an opportunity to focus on what is working or correct what is not.
  • Apply Incentive Compensation to Appropriate Levels/Managers:
    • Incentive pay should be aimed at senior managers or those long enough in their roles or those whose responsibilities can directly impact results.  Senior managers can often typically influence more organization-wide topics than a lower level or front-line manager.
    • Senior managers can also have group goals set (goals that they pursue as a group) as well as individual goals for their own units.

Guidelines for what/how to incent:

  • You Get What You Reward:
    • Reward the behavior you want, not simply target attainment
  • Amount to Incent:
    • The percentage of incentive compensation commonly linked to employee engagement surveys is typically between 5-15% of the total incentive compensation. Other items such as customer satisfaction scores, achieving financial targets etc. make up the rest.
  • Create Baseline First:
  • The first time out, goals should be kept simple, learn the process, create basic action plans and make any critically needed changes.  Second time out, goals can get more complex and are set for both action taken and score movement.
  • Numerical Goals Need not be Uniform:
    • Those at 25th percentile or lower, need to improve more (i.e. move their scores further) than those at 75th percentile or higher. Those at top of distribution can have maintenance goals. Specific goals are best set in consultation with supervisor, rather than by rote formula.
    • Base the program not just on improvements, but on attaining and maintaining a specified level of favorability.  In this way, the managers who are already good at fostering a positive working environment are not punished.  It is always easier for those who need the large improvements to realize the largest gains.
  • Goals Need Not Be Insular:
    • A Combination of Company Goal/Business Goal/Personal Goal can drive the message that both teamwork as well as personal achievement is required to achieve maximum benefit.
    • Goals can also be set only at an organizational-wide or BU level, and not at an individual manager level.  Lower level managers/supervisors can have goals related to activity (completing action plans) rather than numbers.
  • Goals Need Not be Limited to Next Cycle:
    • Longer-term goals aimed at the “ultimate” desired end-state are often necessary. For instance, a 6-point change in score over two years rather than 3 points within one takes a longer-term view.
  • Set Goals Against an Internal Benchmark:
    • Goals set against an internally derived standard often carry the most weight, and credibility, since the goal is to look like how other parts of the organization, or groups within the organization already looks.

Things to Avoid

  • Blindly Chasing a Number – Score Attainment as Only Goal:
    • Targets are often set and people then can lose sight of what they should really be trying to accomplish as they chase the number. Hitting an engagement target represents potential, nothing more. The business does not magically take care of itself just because you hit a number.
  • A Direct Connection to Non-Management Employee Bonuses:
    • Too often employees are encourage not to “screw it up” for everyone and to respond positively on engagement when their own and their immediate supervisor’s bonuses are simply tied to a numerical target.
  • Unrealistic Improvement Targets:
    • If an unrealistic targets or behaviors are selected as goals, when most people don’t achieve goals, they will either look for “work-a-rounds” or the process and goals lose credibility.
  • Statistical Significance as Driver of Goals:
    • As you go deep in organizations, groups get small and make statistical significance an inappropriate choice. Practical significance with a business orientation is best.

© 2010 by Jeffrey M. Saltzman. All rights reserved.

Visit OV: www.orgvitality.com

3 Responses

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  1. Thanks for a clear, simple overview.

    Daniel Baitch

    December 6, 2010 at 9:08 pm

  2. Jeff,
    I both passionately love and hate this topic at the same time. It is certainly something I have wrestled with for my entire career. As an I/O Psychologist, I firmly believe in your mantra, “you get the behavior that you reward” however when we get outside of a simple context and involve entire companies, departments, teams and changing priorities – mix in the politics (oh did I say that out loud?) – it gets complicated to quantify. When compensation is involved, people will be motivated to do “whatever it takes” to get what they need. I just don’t practically believe that being honest, avoiding a black box and communicating the WIFM is enough. This is why, for years, I have advised against using 360 for performance appraisals. Certainly I would love to quantify the process but this is practically outweighed by human nature to 1) help friends 2) bargain “give me fives and I’ll do likewise for you” 3) stick it to your enemies 4) use the system to get ahead in your career. There are decades of research suggesting people will not ==CANNOT== give honest feedback when compensation comes into the picture. It becomes a distractor. Compensation is the very key to life – to paying our bills, to taking care of our families! No amount of “honest communication” or telling what is best for the company will overshadow that underlying fact. I would apply this same thought process to the use of surveys – it is my professional opinion based on what I have seen in my career – that people simply will not be motivated to be honest when compensation is involved. They will be motivated to do what they need to do to help themselves 1) achieve security through their own pay 2) through building relationships with others on the team they can help (e.g., Dana’s example of the sales folks “encouraged” to high five).
    Best,
    Amy

    Amy Bladen, Ph.D.

    December 14, 2010 at 5:16 pm

  3. I appreciate the guidance, but I wonder about the real impact of incentives on engagement. Like Amy, i wonder how the motivation will manifest, and I do fear gaming.

    I have two questions about the practice:

    1) How does changing the context of the engagement measure effect the results? For example, does the distribution change significantly/meaningfully with the introduction of the incentive?

    2) How does changing the context of the engagement measure effect the linkage relationship? For example does the correlation between engagement ratings and business results, such as profitability, customer satisfaction, or employee retention change?

    If anyone has any thoughts, or better data, to answer these questions I would love to hear about it!

    Charley Morrow
    charley@sageassessments.com

    Charley Morrow

    May 9, 2012 at 11:55 am


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