Making Performance Compensation Live Up to Its Name

(originally published on EFA on February 16, 2009 under the same title, republished here, part of our retrospective Above Average: The Best of Escape from Averageness, 2009-2012)

Reference Point is our periodic survey of management practices conducted with homebuilding companies listed on Professional Builder’s Survey of Housing Giants.  In 1999, we asked the senior management of these companies to respond to a series of statements intended to measure the context of business logic they attempted to infuse into their operations.

On a scale of one to ten, they scored a four.

Our conclusion was then, and is now, thirteen years later, that the efforts of a homebuilding company to improve operating performance and business outcomes will largely fail, if it does not somehow succeed first in creating a homebuilding team that works toward commonly-held and commonly understood business goals, versus merely being a collection of so-called teammates working toward individual goals.  What would be missing, is an underlying business logic that forms the necessary context for understanding everything else.

To become the kind of savvy, accountable, and motivated homebuilding team required in order to compete effectively in the business world, everyone on the team has to learn the “business” of homebuilding, they have to understand their individual responsibilities as part of the overall team, and they have to understand what is at stake, individually and collectively.

Moreover, it is not enough that teammates merely understand the business outcome that is at stake, they must have a stake in that business outcome.  That is the role of performance compensation.

What attributes should a good performance compensation plan have?

It should be simple.  It should be visible and transparent.  It should be compelling.  It should bonus on a single business outcome, not an operating outcome;  it should be a single business outcome impacted by the actions of every single teammate.  It should pay bonuses fast and frequently.  It should be self-funding, meaning that the bonuses must pay for themselves out of the additional income that the company produces over and above the baseline plan (the one where everyone justifies their salaries and gets to keep their job).  It should represent a very significant portion of the compensation of every teammate.

It should include every single employee in the company.  It should provide only for the possibility of winners or losers, not winners and losers.  It should give managers the right to lead and to demand results.

Who has the P&L responsibility in your company?

The answer better be “everyone”.