Are You Following These 5 Guiding Principles of Employee Compensation and Rewards?

To get a good handle on the how's and why's of employee compensation and rewards, you have to start with some fundamental truths. You just can't get around them because they are based on human nature. And since human nature doesn't change, these truths are going to be with us for a long time. In preparing this article, I reviewed numerous books, articles, and Internet sources on employee performance. They all point to a set of five basic principles:

• The overall goal of any plan to foster improved employee performance must be improved business results for the company.

• High employee performance cannot be guaranteed by any single factor.

• Internal motivation will endure longer and produce greater results than external rewards.

• Neither money nor ownership, alone, will change employee behavior.

• Your business values and actions must be consistent with the expectations you place on your employees.

Let's take a closer look at each one, bearing in mind that whole books have been written on these topics.

Overall Goal  Sometimes it's easy to forget the real reason for putting a performance-improvement plan into action. That reason should be to improve business results. But before you put your plan into effect, make sure you know exactly how the change  in employee behavior will affect business results. Are you expecting increases in sales volume, reductions in certain costs, improved margins? Do your employees know how the change they're making is connected to the business? And do they know how to tell when they're succeeding in producing these results? If you answer "no" to any of these questions, it's time to make some clear connections between the performance improvement plan and the expected business results. And to communicate that direct connection to your employees.

Four Key Conditions To ensure high employee performance,  create these four conditions for all employees: 

• Information - They need to know about the business results and how their work affects those results

• Skills - They need the skills to do their jobs (of course) but also the skills to understand the business results they're asked to produce.

• Responsibility - They must be given the responsibility and the freedom to do their jobs well. You cannot hold your employees fully accountable for their results unless you give them the freedom and the responsibility to produce those results the best way they know how.

• Incentives - Ownership is the highest source of incentive, but not the only one. Pride in doing a good job, and recognition for a job well done also have a powerful impact on performance.

Internal vs. External Motivation  Study after study after study have shown that external rewards such as higher pay, bonuses and gifts fall way behind the internal factors of recognition and pride in motivating employees toward higher performance. In fact, higher pay has sometimes ranked as low as 16th in lists of motivating factors rated by employees. This is the heart of human nature at work. You'll do well to pay attention and benefit from it.

Ownership and Money Don't Work - Alone  This is closely related to the last principle. Ownership is just a state of relationship. If you want further proof that ownership doesn't motivate by itself, look at all the family businesses being dragged down by poorly performing family members. For ownership to make a difference, the employees must be able to participate in the business like owners, help make valued decisions, and be informed about the financial state of the business.

And money? Employees see their salary or wages as compensation for the job they do. It's a given, like having time off for lunch. Cash incentives only motivate people to earn cash incentives -- in the short run. Once the cash incentives have gone away, so does the behavior that earned them.

Values and Actions Must Match  It all comes down from the top. Employees watch the boss to know how to act. So if a company president tells the employees that he wants their pay and bonus plan to motivate great performance, but the company pays its executives large bonuses regardless of how well the business does each year, then there's a big problem. If a sales force sees its commission or bonus structure changed two or three times each year, making it difficult for them to compute how much they'll earn, they soon get the idea that the company just wants to rig the system against them. So much for improved sales!

So where does this lead us? The inescapable conclusion is that the only way to ensure the highest possible performance from employees is to make sure the entire structure of the business supports high performance. It won't come from manipulating the pay plan alone. You won't produce record-setting performances merely by offering cash bonuses or free trips to Disneyland. No, you have to create an environment where every employee wants to do his or her best every day. Sounds almost impossible, doesn't it?

It's not impossible to create such an environment. But it does take some work. Careful, systematic, and hard work. But you can do it. Oh, you may want some help with parts of the job, but you can do it.

Your future depends on your doing it.

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