No Work No Pay
Performance-based Remuneration
The recent recession once again emphasised the value of an excellent and well-known old business principle. In the good times, when businesses are making plenty of money, they don’t worry too much about this principle; but when the wolf is knocking on the door they’re suddenly very sorry that they ignored it. Then they diligently want to try and put it right, but in most cases it’s too late. The principle I’m talking about is performance-based remuneration.
Plenty of people know exactly what it is, and a lot of people even use it in the good times; certain professions will always stick to it regardless of the state of the economy. These include professions like estate agents and insurance consultants, who usually always work on a commission basis. That’s exactly what performance-based remuneration means in its simplest form, but most people think that it’s something that applies only to salespeople. Definitely not.
Other situations where you’ll find performance-based remuneration fairly regularly in all circumstances include, for example, directors’ performance bonuses at the end of the financial year. If this system works well for salespeople and directors, why not for other staff and managers as well?
It’s not always practically possible to apply it to each and every function in the business, but if we could, we would have staff who are worth every cent that they earn – and that’s what will make the difference for the company in tough times. In good times everyone looks good, but in tough times you can easily spot the passengers. And if they look like passengers in tough times, then you can believe me when I say that they were even worse in the good times. You just couldn’t see it amidst all the prosperity. Now they stand out like sore thumbs, and it pains you to pay them a fixed salary that they “aren’t earning”. The good staff who also didn’t get noticed in the good times are now shining like diamonds, but they’re also now suffering under the financial burden placed on the company’s limited reserves by the passengers.
What companies then usually do is start time-consuming and expensive staff layoffs in order to get rid of the passengers. It’s all so unnecessary and could be so easily avoided if you always handled your staff’s remuneration exclusively on a PERFORMANCE-BASED REMUNERATION BASIS, regardless of the economic conditions or the company’s financial position.
The philosophy behind performance-based remuneration or paying for performance is to reduce any job function in the business to measurable units so that you can then pay a pre-determined fee for that unit of work to be done.
Think about it like this:
If someone is paid for the time they work versus being paid for the results of that work, they are incentivised to do as little as possible per hour as they know that they need to stretch the work load to fill up the hours in the day. If however they are paid for the completion of a task at a certain quality standard, then they are incentivised to do as good a job as possible in the shortest possible time.
Performance-based pay links remuneration to individual achievement (or non-achievement) of predetermined outcomes and/or the performance of the company. It takes several forms, including performance-based changes to base remuneration and the provision of bonuses and other one-off type rewards.
Think about it: if your business had already switched over to a performance-based .........................
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As you said, it cannot be applied to all functions, some you just need like a receptionist. But even for them you will get what you measure and pay. If you reward rudeness you will get it. Performance remuneration should definitely be part of the pay structures. Although I think the underlying problem for non performance is the inability of companies to write real job descriptions that are based on outcomes that can be measured and rewarded, rather than performance based remuneration. You are right the philosophies run to deep to debate here. Some companies we work for have lost 40% of their turnover last year, at that point you could have had any system in place, you are in trouble and the lay-offs will come, even some of your better people.
I just like the extremes, it always show the flaws and the opportunities.
Hoop dit gaan nog goed
Hennie Visagie
Comment by Hennie — March 11, 2010 @ 8:45 am
Your comments are valid and interesting as always. Just a point for you to ponder, there are 2 types of people (broadly speaking) those who run businesses and those who work in businesses. The workers are just workers – they have never had the inclination to run or own businesses – they don’t want to manage people. You can’t force them to have the same passion for your business as you do. Their focus is mostly on things outside of business and they work for a pay check. But more importantly they most probably don’t have the skills or the aptitude to equate their days work into a rand value to the company. As for the people who run the businesses, they are pretty busy as it is – getting them to now start evaluating their staff on a reward system lends itself to micro management and a new tedious and time consuming additional task.
Get dynamic I say, be creative in running your business and work out ways to get the staff that you have to achieve the greatness that they can achieve to the benefit of the company without equating it to a rand value.
Just a thought….
PS – I have just gone from performance based remuneration to a fixed pay check because my company wanted to be able to control what I do and how I do it. I hate it – they love it. I’m looking for a new job as we speak.. ..
Have a great day and thank you for the always interesting articles.
Janine
Comment by Janine — March 11, 2010 @ 9:18 am
The principal is good but if the performance measures are not considered very carefully it can cause a lot of damage. Some departments or functions in a business have conflicting needs and it is very important that the measurements look at the common goals. (E.g. the old fight between maintenance and productions – Maint wants the machines down for a little bit longer to do a proper job to prevent a major failure and production wants it to run the whole time to achieve maximum production. Who is correct?)
Also day to day performance measures can cause you to loose focus on what is important in the long run. Maybe you need to take a decision now that will impact on your day to day performance but will have a long term benefit.
Lastly, target setting is very important. It must be a stretched target but attainable. Making it too easy can basically have the same effect as having no performance based program and making it too stretched can have a negative impact on moral and cause disinterest also leaving you with a time based reward.
Comment by RudolphS — March 11, 2010 @ 9:45 am
I like your articles. They are always very interresting. I only have one problem with this article…. What about paid leave for holidays and vacations? How will this be caculated on the performace based remuniration? Each employee is entitiled to leave a year…Performance bonuses are great idea – but to have a basic salary helps when you want to go on vacation or are you going to say…Sorry boys no more vacations of paid leave…no work, no pay….
Comment by Annette — March 11, 2010 @ 11:21 am
The labour law makes provision for paid leave for commision based employees who spend more than 80% of their time in your business. With more than 80% time spent the employee is considered a permanent worker and thus qualifies for leave benefits. Please consult the labour law on this but it states something like an average pay calculated from the last 3 to 6 months paycheques must be given. A way around this is to determine a percentage commission with your employee and to then add say 2% extra to that,stating that the 2% is for payed leave. This has not been tested at the CCMA though…and I am not a labour consultant.
Comment by Pieter Willem — March 11, 2010 @ 3:40 pm