Sunday, September 7, 2008

Harnessing the Power of Trust with Pay for Performance

Darren Gorton in his blog (Item 5 in September Carnival of Trust Top 10) Trust vs Control: Is control merely a substitute for trust? makes a perfect case to nurture the culture of trust to deter fraud and reduce cost of control.

I further extend his point and argue that creating, developing and nurturing Pay for Performance culture is the first step towards harnessing the power of trust between employees, business partners and stakeholders. Here is why.
1. Organizations that embrace Pay for Performance philosophies communicate often with their employees about organization goals, contribution of individuals to the organization goals and how individual pay is linked to the performance. This transparency is the first seed in developing trust between employer and employees
2. A well-designed pay-for-performance system increases employees’ understanding of what is required of them, their performance and the organization’s outcomes. Merit awards, bonus and promotions are based on evaluations by the person's supervisor, colleagues and people they supervise. So everyone knows that the rewards are based on collective feedback of the team itself, fostering team trust and collaboration.
3. With Pay for Performance culture, the pay increases and bonus are consistent across the various functional units of the company. So, everyone in organization puts their best to drive organizational goals, fostering cross-functional synergies.
4. Organizations that use sound pay-for-performance practices enable transparency of executive pay and it’s linkages to performance to the stakeholders. Empowered with this transparency, stakeholders and business partners now have more reasons to trust the organization leadership pursuit of corporate goals.

With the difficult economy driving the urgent need to bring out the best in people (with trust) and reduce the cost (of controls and fraud), there is no better time than now for organizations to create, develop and nurture the culture of trust and transparency with Pay for Performance practices.


Darren said...

Hi Gopi

Thanks for the mention here, much appreciated. Interesting how you apply it here to pay-for-performance.

Your first point is on the money! Communication and transparency... quite difficult things to do but I believe also holding the most real long-term value in developing the relationship.

A question for you - how do you weigh up pay-for-performance vs actual shareholding? [ie is shareholding a better and more real long-term incentive than performance pay?] Would like to hear your views.

Take care.

Sean O'Cairde said...

Hi Gopi
I believe pay for performance was an idea for yesterday. Today companies basically hold unto people not by paying them, but saying the market is bad so stay with me. More often in todays economy and state laws, how do companies reduce their workforce. Companies are trying run leaner and meaner and its at cost to its employees, including good performers. Jobs are outsourced and we constantly hear of layoffs, even among professionals, today we are in an uncertain economy with new paradigms.

Gopi Padakandla said...

Hi Darren,

You are welcome.

In my opinion a well designed pay-per-performance plan rewards long term performance by promoting shareholder value and at the same time recognizes the accomplishment of goals towards long-term performance. Shareholding (restricted stocks, long-term stock options) is a proven mechanism link pay to long-term performance, especially for executive compensation. The short-term incentives are still required to provide immediate gratification by recognizing the individual contributions and/or accomplishment of milestones, say annual profit targets, towards strategic objectives. This typically includes cash component.

Gopi Padakandla said...

Hi Sean,

I totally understand your concern.

I agree that meager budgets in difficult economic times also mean doing a lot with few resources. I strongly believe that only those organizations that know how to get best from their people survive this economic storm. P4P is powerful enabler of this strategy.