Compensation, Culture and Productivity
Using Fixed Compensation to Create a Culture that Drives Productivity
Most businesses consider fixed compensation (regular base pay) an operating expense of a business instead of an investment with all the corresponding features, including cost/benefit analysis, capital outlays and ROI. When we see wages as an investment, the relationship becomes much clearer.
Let’s start by understanding and defining the role that fixed pay plays in relationship to other forms of compensation and rewards in your business. Doing this will help you understand the difference between paying for what gets done (job-based pay) and paying for how it gets done (Skills, knowledge and competency (SKC)-based pay.) Since we know we should be thinking of fixed compensation as an investment and not an expense (a base salary increase provides compensation into the future), it needs to reinforce how things get done. These are the behaviours, skills, knowledge and competencies that will keep your business productive in the long term. This is critical in creating a culture of productivity because it links compensation opportunities with the potential to contribute to productivity improvement. When your employees are involved and feel like their contributions are making a difference, it's much easier for them to think and act like owners.
In the space below, sketch out the relationship between fixed pay and other forms of compensation in your business. Do you believe your employees are motivated primarily by their base pay, or by other systems you've implemented to reward their growth?
When you think about your business, you know there are certain things it does well. Any number of strengths or circumstances can make a company successful, but there are a number of key areas that all long-lasting, successful companies focus on. These include:
- Creating value for your customers
- Follow through on execution
- Clear and concise communication
- Effective, efficient and consistent processes
- Simplicity of process design
- Continuous improvement
- The long-term picture
- Attention to detail
Your company will have its own mix of these productivity drivers, and will no doubt have others. When you look at your company’s core capabilities through behaviour like those listed above, you're forced to examine how your people can and should impact them. Once you have defined these specific behaviours for your company, fixed compensation can be used to reward people for their development and demonstration. For example, if you know that without follow through on projects, your company has no value in the eyes of your customers, you can use increases in salaries (fixed compensation) to reward your employees who consistently execute your systems, policies and plans.
In the space below, write down your business' core HR capabilities. Does your current compensation model pay appropriately for these core capabilities, or does it reflect other priorities?
Using Variable Compensation to Create a Culture that Drives Productivity
As opposed to fixed compensation, which is an investment in the future, variable compensation is a reward for the achievement of immediate results. Effective variable pay programs have clear goals and metrics along with well-defined mechanics for basing rewards on performance.
An effective incentive program that creates a culture that drives productivity improvement usually has the following characteristics:
A. It measures productivity and productivity drivers.
B. It has a method to differentiate between the results of actions of different individuals or groups.
C. It has a direct line of site between your employees’ actions and their rewards.
Finding the right measures of productivity first requires a good definition of productivity that's specific to your business. Once that's developed, it will be easier to define the metrics and the drivers.
In the space below, write down how you would define productivity in the various departments of your business.
The Major Categories of Productivity-Oriented KPIs that Relate to HR Include:
Variable compensation should reward the behaviours that directly and positively impact your productivity. It's important to have a very clear understanding of which metrics define productivity for your business. Below is a list of some of the major categories of KPIs that tell the story of productivity.
A. Production - How much is getting done.
B. ROI - How much it costs to get things done.
C. Value creation - How much actual value is being created.
D. Cycle time - The time it takes to get things done.
E. Customer satisfaction - Your customers level of happiness with what it's you are doing.
F. Execution - Accomplishing what you set out to accomplish.
In the space below, define the KPIs that measure productivity in your business.