Paying for Performance
Back in 1999, Daman Products Co. implemented a bonus plan. The 65 manufacturing employees at the Mishawaka, Ind., maker of parts for hydraulic systems would be evaluated on these criteria: meeting production schedules; maintaining their machines; and reducing overtime, scrap, and shipping errors. Productivity surged, and some employees added as much as 15% to their paychecks.
Then the economy took an unexpected U-turn, and so did Daman's sales, plunging some 20%. Forget about bonuses. The company went into survival mode, cutting about 20 jobs. And after just one year, Daman Products put its bonus program on indefinite hold.
The story is all too familiar. After all, you can't share the wealth if there's no wealth to share. Fortunately, that's beginning to change. After several years of offering skimpy bonuses -- or, like Daman, none at all -- businesses large and small are expected to reopen their checkbooks in the months ahead, says Tom Shea, a Boston-based managing director with compensation consulting firm Pearl Meyer & Partners. For senior executives, payouts are up about 20% this year, Shea says.
Rather than simply handing out checks, many entrepreneurs will be linking bonuses directly to how well their employees performed. Some 77% of employers currently link compensation to performance, up from 66% in 2001, according to WorldatWork, a professional association in Scottsdale, Ariz. But getting pay for performance right is no easy task. Only 17% of employers, for example, reported that their incentive programs were "very successful" in helping boost financial performance, retain top employees, and increase customer service, according to a recent survey by WorldatWork and consulting firm Hewitt Associates.
The biggest problem, the experts say, is that too few employers put adequate energy into devising their bonus programs. It's common, for instance, for businesses to simply divide the bonus pool so that high, midrange, and poor performers get 5%, 3%, and 2%, respectively. As a result, some top employees are left wondering if their contributions really are being recognized.
There's nothing mysterious about the system at the Transtec Group, an Austin transportation engineering firm. The 10 employees know that they're being judged on seven qualities -- productivity and quality, loyalty, team building, creativity, management, ownership of job, and ownership of company. In fact, workers are encouraged to ask for advice on how to increase their bonuses. The idea, says president Dan Rozycki, is to get employees to behave like owners. "A salary pays you to do your job," he says. "A bonus pays you to give a damn."
One engineer, for example, developed a new software tool to help state highway agencies analyze road-quality data. That's meant a new line of business for Transtec -- and a better bonus score for the employee. Some employees, of course, aren't in a position to develop new lines of business. But Transtec's administrative assistant, for example, boosted her score by volunteering to prepare PowerPoint presentations for the engineers, saving them hours each month.
Each year, Rozycki distributes between 25% and 50% of profits to employees, some of whom add as much as 10% to their annual salaries. That's a considerable sum, and Rozycki says both sales and profits have jumped about 20% in each of the past three years -- something Rozycki credits mostly to the incentive program.
Daman Products hopes to see similar results over the next few years. The company, which weathered the downturn by boosting productivity via a wholesale reorganization of its manufacturing process, is finally seeing profits again. As a result, it plans to reinstate its incentive compensation program by the middle of next year. "We'll use the same measures," says vice president Dave Mischler. "That part worked. It's just that the company needs to make money in the first place."