We often accept as an unquestionable truth that the bonus system motivates employees, in particular employees of sales departments, to work better. And as in life, sometimes it will motivate them, and sometimes it will have the opposite effect.
by: Irek Zyzański
In this article, I will focus on P4P (pay for performance) systems, i.e. forms of awarding for bringing results to sales departments. I will use the term P4P, which is quite common in the HR environment. I will not analyse managerial bonuses, company shares or dividends, which are equally interesting, but they are another story.
During my work in Asia, the Middle East, and Europe, I often had the occasion to take a closer look at and participate in the development and implementation of bonus systems for sales departments. I would like to share with you several practical thoughts on the critical areas that require special attention of HR departments and business in general. When designing a new or modifying the existing bonus system, it is worth remembering about a few areas.
Matching the culture of the country and organisation
In Asia, I observed international companies introducing P4P in their local organisations. Their basic mistake was not to take the country’s cultural importance of teamwork into account. In one of the companies in Indonesia, an HR director newly arrived from the US headquarters did not take cultural conditionings into account, ignored the advice given by his local subordinates and directly copied the American approach to P4P, deeply believing that an individual bonus will increase the employees’ competitiveness and motivation. However, the opposite happened.
Introducing individual P4P systems with a forced distribution curve, where individual employees were awarded, was an infringement of values which are very important in a large part of Asia: teamwork, harmony, and the sense of belonging to a group. When the first bonuses were paid under the recently implemented P4P, the employees who received higher pay-out felt that it was unfair and shared them with their team colleagues who had not received any bonus or received a lower one. This led to frustration and discontent – after all, we all work together. After a year-long experiment, the system had to be changed and team bonuses reintroduced.
System reliability
When a company is planning to implement P4P, it has to face the problem of launching the programme. When asked if they want to receive a performance bonus, most employees will say yes. Difficulties start to appear during implementation. If there is no such system in the company yet, then, the guaranteed salary has to be lowered. And this will no longer be so well received by employees.
When building a P4P system, we usually want it to be budget-neutral and the increase of remuneration in the form of bonuses to be financed by higher productivity. This means a significant decrease of the base salary, usually around 20-30 percent. The base affects many things – the sick leave, holiday leaves, severance pay or the position in range, which in most companies is linked with a percentage value of annual increases. All this can be included when creating the programme, but the more complicated the rules, the more difficult it will be to present the program in a simple way, and employees will start to suspect bad intentions on the part of “those from the top”.
I remember how bad the atmosphere became in a certain company many years ago due to introducing the P4P system for a part of the Sales Department. One of the consequences was the creation of a new salary grid for employees included in the system, while the rest remained covered by the old one. As a result, their position in range increased (according to the rules, HR had to take total cash, i.e. total remuneration, into account), and the group of employees covered by the bonus received a smaller percentage increase at the occasion of the annual increase than their colleagues to whom the bonus did not apply.
Even though this was explained to him before, the Sales Director truly understood these consequences only when annual increases were being introduced, when his people started to complain that a part of employees received a lower percentage value than the rest. All the blame was of course put on the HR. Generally, there were numerous misunderstandings and the success of the P4P implementation was overshadowed.
Balance and stabilisation
A common drawback of bonus systems is their excessive complexity. Their creators try to take a lot of factors into account, thus making them illegible for employees – multi-level matrices requiring the generation of complicated analyses, percentage breakdowns with changed and general market conditions, a forced ranking, etc. If employees are unable to clearly assess by themselves how well or badly they are doing this month or quarter, they will quickly lose hart for the system and start believing that “those from the office will make their own calculations the way that they want”. This way, the system starts having a demotivating effect.
On the other hand, there is a risk of excessive oversimplification. By awarding employees for four or five parameters that they are themselves capable of controlling, we are encouraging them to focus on these areas, while at the same time sending a clear signal that other areas are not important. And of course they become unimportant. Then, after some time, it turns out that some important element, usually a “non-numerical” one, which has not been included in the programme’s matrix, has been dramatically neglected. Sales employees start saving their effort in performing their work and focus on actions for which they will receive the bonus.
Fuses in the system
Rarely companies decide to implement the P4P system without embedded fuses. They want to avoid the so-called “golden shots” that creative people from sales departments will sooner or later come up with. To avoid this, we just have to embed fuses in the system, setting the parameters in such a way that it is impossible to grant a higher bonus above a certain performance level or determining the salary matrix parameters (it is rarely the sales alone) so that they cannot be physically achieved.
It looks beautiful in a presentation for the Management Board, but somewhat worse when communicated to the people to whom this system applies. They will make their own calculations and find the fuses very quickly. If the message is wise and transparent, they will accept the reasons. If we omit this in communication, both motivation and trust in the Management Board and HR will drop.
Who should be included in the system?
The answer to this question might seem easy – a group of employees who have a real impact on the achievement of sales targets. The thing is that often no clear boundary can be drawn. Let us take employees of sales departments in the car industry as an example. Often, the coordinating person on the customer advisor position receives the commission for the sale. However, this person’s results are affected by other employees of the showroom – technical experts, first contact persons or credit specialists. They usually do not receive any commission or receive a much lower one.
Does this system motivate to work better? It certainly does the customer advisor. But everybody around knows that they are working for someone else’s bonus. Is the entire team motivated thanks to this? I seriously doubt it.
This is where my opening question comes from – are P4P systems a cure to improve results or rather a poison slowly killing group motivation and the level of services? There is no clear answer to this question. Everything depends on problems to be solved. I myself believe that bonus programs should motivate the team rather than individuals, and it is surprising how often it turns out that ensuring a competitive salary without the bonus but with efficient leadership through non-salary motivators proves to be a better solution.
One thing is sure – we have to be a strategic leader for the business specifically in this HR area.
Irek Zyzański
is a ICF PCC coach, mentor and consultant, director of HR and sales departments. He worked in Libya, Ukraine, Dubai, China, Russia, Indonesia, and Hong Kong.