In a past entry, I elaborated on the concept of “double-dipping.” That is when a person is paid twice for the same performance. This occurs often in pay programs that fail to adequately distinguish between what performance warrants a base salary increase and what performance justifies an incentive payout. In many companies, excellent performance results in both.
Instead, I strongly advocate that pay programs clearly distinguish between these two types of performance. But simply distinguishing is not enough. They need to be divided in a specific manner. That is, base salary increases for managers should be predicated exclusively on leadership effectiveness. Incentive payouts should be predicated exclusively on outcomes or results.
Approaching pay this way enables businesses to do something very important – that is, answer the question “Are my best leaders getting the best results?” The reason this is so important is that it is often not the case. It is surprising how frequently we find that weak leaders are generating excellent results, and strong leaders are generating poor results. This can occur because weak leaders may bully their employees to get results, and strong leaders may be too soft on employees and don’t hold them accountable.
If the pay program can tell us who are our best leaders, and who is getting the best results, then we can begin to focus training and development efforts to improve their specific weaknesses with the goal being to have the best leaders producing the best results. In addition, we can begin to weed out cases where poor managers are getting weak results. Conversely, we can avoid accidentally losing the leaders who are getting excellent results simply because they are weak managers.
In a properly designed pay program, it is possible to rank managers from highest to lowest on BOTH leadership effectiveness AND results. The exhibit below is an actual such ranking from one of my clients (the names of the managers have been suppressed).
The left hand column ranks the managers from the best (1) to worst (38). Adjacent to each one is the associated ranking of their results. For example, the best leader (1) produced results which ranked 25th out of 38 (not very good). The 5th best leader, on the other hand, produced the best (1) results.
Looking at the other end of the spectrum, the worst leader (38) also produced the worst results (38). When viewed in this manner, it becomes easy to see which managers are “keepers” and which should be considered for replacement. In the exhibit, the managers highlighted in green are the best, the ones in red are candidates for replacement, and the ones in yellow are at risk. The others are what you might call “typical.”
This demonstrates the power of a well conceived pay program. And it all stems from a basic separation between the factors that drive base salary increases and incentive payouts.