The StrategicPay Blog is very happy to have Paul Hebert of I-2-I and the Incentive Intelligence Blog as a guest blogger.  Paul is a leading expert on the application of incentive and motivational programs to various compensation and rewards programs.  To contact Paul, click here for more information.  Thank you Paul!

Even if you have Pay For Performance You Still Need Non-cash Incentive Programs

Pay for performance (P4P) is hot right now.  Companies struggling to rein in compensation expenses are looking at P4P as a solution.  Pay a base salary, and pay additional monies for performance over and above some benchmark.  That is an incentive.  It is the basic "do this- get that" structure.

But, if you have a P4P system in place do you need other "non-cash incentives?" 

My answer is yes.  Not 'cuz I sell incentive programs and associated awards (I don't – I sell advice on how to design the best influence programs.) 

You need additional non-cash incentive programs to guide the behaviors that lead to the "performance" part of P4P.

A Couple of Goals A Couple of Bucks

From my point of view, P4P typically focuses on a few goals that when achieved will increase the person's compensation.  However, most jobs encompass a huge variety of tasks.  Too much emphasis on one or two goals and the majority of other important tasks may suffer from the focus on the achievement of the cash-reinforced tasks.  Too much emphasis on a few performance goals can lead to some wide ranging effects.

The Atom Bomb

The best metaphor/analogy (I can never decide which is the right use) for this is…

P4P is like asking a pilot to bomb a weapons factory.  They load the plane, take off and go to the target.  They get over the target and at just the right moment they open the bomb doors and drop the bomb.  Hopefully it will be close enough that the power of the bomb used will take out the target.  It doesn't have to be right on target because the bomb's blast radius is big enough to hit the factory even if it lands a block away or 10 miles away –depending on the power of the bomb. 

An atom bomb has a pretty big blast radius so I don't need to be very exact if I want to take out the factory.  Think of some of the bonuses on Wall Street as atom bombs.

That's kind of how your P4P works if you allow too much to ride on one big incentive opportunity.  You can give folks a target to hit – and a big bonus (blast radius) – and they will do whatever is necessary to drop their bomb.  Unfortunately, because the blast radius is very large you risk a lot of collateral damage - unintended consequences.

A Smart Bomb

Contrast that with a laser-guided bomb.  It is physically smaller, with a much smaller blast radius.  But it is very accurate.

Even if you have Pay For Performance You Still Need Non-cash Incentive Programs

To make a smart bomb effective you need some system to adjust the flight of the bomb as it falls to ensure it hits the target.  Guided bombs have very complicated electronics and the ability to change their trajectory.  That's what makes them accurate.  But that's also what makes them expensive. 

Smart bombs trade the cost of collateral damage for the cost of accuracy.

You could try to convert your P4P atom bomb program into a P4P smart bomb program by guiding behavior toward a goal using a bunch of smaller cash awards that target specific behaviors based on individual skills.  But trying to keep up with very specific goals would mean adjusting compensation plans so frequently no one would ever understand how they were getting paid.

Remember, we're dealing with compensation – the stuff people use to pay for condos, cars and college.  Messing with compensation is serious business.  Most people need to plan and have some sort of understanding of what their next check will look like.  Not many employees can live the life of commission-only sales person who consciously takes on the risk of widely variable pay to achieve an overall higher level of compensation.

So in the P4P world you can either have a few very broad goals that can result in unintended consequences (as most plans do), or try to create many, many small goals that change frequently and create confusion and apathy.

Neither scenario is good.

Non-Cash Incentives

Non-cash incentives allow you to guide behavior without the same expense and confusion. 

Non-cash incentives guide behavior but because they are not linked to compensation, (or shouldn't be) you don't have to adjust compensation plans, worry about confusion or discrimination.  And - you get another benefit – non-cash awards typically have a higher "perceived value."  Non-cash awards tap into the part of the persons brain that imagines them using and having the item/trip – not just the dollar value of it.  It changes their relationship with the reward.  This can help decrease your overall cost.

Using non-cash awards as the guidance system on your P4P program will allow you to impact behaviors that drive results, reduce costs, reduce comp plan changes, clarify goals and allow you to adjust direction more often.

In other words, non-cash awards allow you to create a "smart bomb" and reduce the blast radius, increase the accuracy and avoid a lot of pitfalls associated with changing compensation structures.

Take a cue from our own military – what are they using more of today – atom bombs or smart bombs?