About 10 years ago, consultants started emphasizing pay-for-performance as a motivational tool. The idea stuck.
Today, the challenge for managers is identifying the right metrics. The measures that you select must resonate with every employee, says Ellen Benjamin, president of Benjamin Consulting Group in Minneapolis.
If you want to introduce a bonus structure, set a threshold that everyone must meet before special payments kick in. That way, you tie bonuses to the amount that each worker exceeds an already high standard of performance or production.
Also consider the timing of the payments. You motivate people more effectively by paying bonuses frequently throughout the year—even if the amounts each time are smaller—than by waiting to pay them annually.
"Psychologically, we need more regular, periodic reinforcement," Benjamin says. "Once a year is too long a period to shape our behavior around."
Speaking of motivation, the most powerful metrics have a clear "line of sight." That means each worker sees how to control the outcome and knows what steps to take to excel.
Holding everyone accountable for, say, enhancing shareholder value or contributing to profit margins of a certain percentage sounds sensible. But a warehouse clerk or administrative assistant may have no idea how their performance can increase shareholder value or boost margins.
"The more an employee can control it, the more that person will be motivated to do something about it," says Don Nemerov, executive director of compensation practices at Grant Thornton, a global tax and business advisory firm.
For a collective goal such as raising shareholder value, help each employee tie his or her performance to this overarching aim. That may boil down to everyday activities such as buying supplies efficiently or eliminating waste of resources.
As you explore what constitutes superior performance, don't keep adding new measures to evaluate employees. Nemerov recommends that managers focus on three or four per person. If you rely on too many metrics, you may confuse the people you're trying to motivate.