The Resurgence of Pay-For-Performance?

Most businesses are running lean and mean these days. Dead weight staff has been cast aside and employees that remain are just happy to have a paycheck. Now many who work in entrepreneurially-run companies are left wondering: what will future income growth look like and when will it re-appear?

During a conversation with Norm Brodsky at Inc. Business Owners Council's end-of-year bash in New York, he suggests that employee income growth will increasingly take the form of pay-for-performance compensation programs. This trend is important because valued employees need to be retained and rewarded but owners need the downside protection to shield themselves from the vicissitudes of a slowly re-emerging economy.

Pay-for-performance is common with our revenue-based staff, such as sales people. And company-wide bonuses are nothing new (although they seem like a distant memory to many) but pay-for-performance for non-revenue-generating staff is a whole other thing. Here's Norm's three-point program for introducing pay-for-performance in your firm:

1) Open up your books just a little. While you may not be interested in opening up your financials to your staff entirely, you'll have to give them enough information to understand how they're compensated. If the production/manufacturing side of your business is going to receive bonuses for keeping production costs low, you'll need them to understand the costs that go into making your widgets.

2) Commit to teaching financial literacy to your team. Jack Stack, the co-author of The Great Game of Business complains that management expects workers to help them stay profitable but they never teach them what profitability really means. A firm's cash flow and balance sheet statements tell exciting stories, according to Stack, but you'll never get your employees to pay attention to performance if they don't know the difference between revenue and profits.

3) Explain the difference between a one-time bonus for performance and a permanent bonus. Employees are conditioned to expect any one time amount on a permanent basis and will be disappointed if it doesn't show up every time. This is why items #1 (opening up the books) and #2 (teaching financial literacy) are so important to creating a successful "pay-for-performance" program in your firm.

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