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November 02, 1999
That Elusive Dangling Carrot
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king Rewards with Performance

Is there a link between reward systems and high performance? Yes, says Jack Dolmat-Connell, vice president and managing director of the Wilson Group, Inc., a full-service consulting group in Concord, Massachusetts, that focuses on connecting companies reward systems with performance. There are a significant number of studies that have been carried about by organizations other than ours which show a strong link between the two, notes Dolmat-Connell. In particular, is the research by Mark Huselid at Rutgers, who has studied over 1,000 companies and found that there is a very tight correlation between those two items.

With this knowledge, the Wilson Group has embarked on its own research to find out what companies that are successful in linking rewards with performance have in common. What we found was that these programs have three similar components: First, they have a compact set of objectives that are well defined. Secondly, they identify the types of behaviors necessary in employees to reach these goals. Finally, they offer employees proper rewards.

Dolmat-Connell simplifies the three components into five steps:

  1. LINK business strategies to unit and employee goals
  2. FOCUS employees actions on carrying out key objectives
  3. MEASURE performance in meaningful and effective ways
  4. PROVIDE FEEDBACK that facilitates action
  5. REWARD and RECOGNIZE contributions, so employees take action

Setting Goals

Dolmat-Connell says that each of the components is critical to the success of the reward program but that setting specific goals is the crucial starting point. He says, companies must identify the why of the program. Are they interested in bettering their customer service skills, working faster and being more flexible, or developing new technical skills? If so, they need to have a clear understanding of those goals first, before they can identify the skills the employees need for accomplishing those goals.

It is best if the employees come into the company with the necessary skills; therefore, consideration of better performance begins during the recruitment process. In addition, management cant shirk its responsibilities towards performance. Making sure employees develop the right behavior skills also means that management must not only talk the talk, but walk the walk as well. If [managers] aren't modeling the right behavior, employees will not take them seriously, Dolmat-Connell explains.

Finally, companies need to make sure that the rewards they are offering are ones that the employees care about. Dont take a one-prize-fits-all attitude, warns Dolmat-Connell. The best way to find out what would motivate employees is to ask them. Sometimes, you many even find that the best rewards are the least expensive.

Case Studies

Wilson Group, Inc.s president, Thomas Wilson, has documented the success of the companies his organization has studied. His latest book, Rewards that Drive High Performance: Success Stories from Leading Organizations (AMACOM, 1999) presents the case studies of several companies that use reward systems to promote performance. Dolmat-Connell offered three examples.

  1. Amazon.com From the beginning, this company did not have a lot of cash, yet it wanted to attract and retain incredibly talented people. In addition, the work environment is the opposite of what one might call plush. Desks are made out of recycled doors, file cabinets are made from milk crates, and telephone books serve as computer stands. So how do you recruit top talent without really good base salaries, any bonuses, and no lavish offices? Amazon.com offered employees a few other rewards. In only three years, these stock options have made probably 200 to 300 of them millionaires. First, employees were given stock options designed to give them a very, very significant option award, especially for those who came to work early on with the company. In only three years, these stock options have made probably 200 to 300 of them millionaires, notes Dolmat-Connell. Employees also have had ample opportunity for advancement within the company. The development opportunities that they dangle in front of their employees is phenomenal. You could have joined the company two years ago, which a lot of people did, and you might have managed five people. Now, after two years there, you could be managing 150 people because the company has grown from 300 to 3,000 employees.
  2. Southwest Airlines Like most airlines, Southwest focused its goal on customer service as well as differentiating itself from other airlines. The goal was to create an environment that viewed exceptional customer service as the norm. Similar to Amazon.com, the new airline didnt have a lot of money. Base salaries are probably competitive at best; bonuses probably slightly under the competition, explains Dolmat-Connell. But they get phenomenal people because one, they have created a great atmosphere to work in, and two, they put a tremendous amount of emphasis on recognition. Southwest Airlines shows us that not all rewards have to be expensive. They are not going out, like a lot of companies, and giving their employees a $1,000 cash award or nice vacation. A lot of what they are doing is based more on token kinds of things, like announcing what a great job someone did at the company meeting or in group meetings. Southwest Airlines shows us that not all rewards have to be expensive.
  3. Genzyme This company had a great business model, according to Dolmat-Connell, but its stock had been really languishing for the past few years, much the same as the stock in other biotech companies. Genzyme wanted to do something to really focus on delivering shareholder value, but knew a plan was needed to get Genzyme executives motivated to make some of the tough decisions that needed to be made. Because it provided a tremendous motivational vehicle for these executives to really get energized about making some tough decisions and doing what was necessary to change the business. What Genzyme did was put into place a plan called Premium Price Options, that differed significantly from a standard stock option. Dolmat-Connell explains the approach: What they basically said to their executives was, We are going to give you double to almost triple the number of options you would normally get, but you are not going to get them at fair market value. You are going to get them at a premium over fair market value. That was a very risky strategy to take, and not a lot of companies are doing it. More should, because there are a lot of companies out there whose stock has been driven up as the market has increased, but they still havent been performing that well. Within nine months of implementing their plan, Genzymes stock jumped from the mid $20s to almost $60 a share. The Premium Price Option Plan certainly can be given a lot of the credit for this increase, says Dolmat-Connell, because it provided a tremendous motivational vehicle for these executives to really get energized about making some tough decisions and doing what was necessary to change the business. There are many compelling reasons for businesses to try to match their reward system with performance, the most compelling one being that it has a positive effect on the bottom line. Companies that do it well have high-performance workers, states Dolmat-Connell. So, while they may spend $2 million, $3 million, or even $5 million on the rewards program, they can get phenomenal returns that are probably 10 to 20 times that amount in terms of return to the business.

Reprinted with permission from BLR's Best Practices in Compensation

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