“Tell me what you pay me for and I’ll tell you what I do”
Though this is not a popular Mexican saying, it is a key management tool. I attribute the saying to Javier Palomarez, a former boss who was professional, inspiring, smart and fun. He is currently the CEO of the USHCC where he continues to positively impact business and the Hispanic community. His thesis was quite simple, one that in management-speak boils down to ‘aligned interests’. I have seen many situations where a fellow entrepreneur will say, “I just don’t understand why [insert functional area here] is not hitting its goals”. When we scratch a little bit into it, many times it turns out that compensation is not aligned with the desired results. What does this mean? If you go back to the deceptively powerful saying it means that yes, cash can and will influence a person’s behavior at work. Shocking, right?
Surprisingly many entrepreneurs do not understand this. They define compensation schemes based on organizational/accounting simplicity, what they understand as comparables or whatever HR suggests. In many cases, the actual desired outcome of the role is completely ignored.
I have been co-founder of two consumer credit companies, Progreso Financiero in the US and Mimoni in Mexico. In both companies we quickly realized that if you paid salespeople just on sales (sounds logical, right?), you end up with poor collections results. Since the ultimate goal of a credit company is to get paid, aligning bonuses just on sales created the wrong incentive and encouraged the sales force to push loans regardless of payment potential. The moment we devised formulas that incorporated customer payment behavior to a salesperson’s commission scheme, overall company ROI went way up. Even though the sales force did not have any kind of influence on a credit approval or denial, they still had influence over the customer’s behavior after approved, and they used it to the company’s benefit if their bonus depended on it.
The key learning for us was that even though companies are loathe to tie someone’s variable comp to something they, the employees, in theory cannot control, we have found that as managers we constantly underestimate the actual amount of influence a collaborator can have on every part of the business process.
In Mexico, my partner, Pedro Zayas, and I decided to expand bonuses to areas where you would not think of paying for performance. Having a large sales organization and call center we saw a lot of turnover and had a veritable HR recruiting machine going in the office. An issue that we closely tracked was number of scheduled interviews where the candidate was a no-show. We were seeing close to 50% of interviewees simply not coming to even the first interview after a phone screen with our internal recruiters. We set up a variable comp plan for HR that included bonuses for percent of folks showing up for interviews. We went from about 50% no-show to less than 20%, significantly reducing overall cost per recruit. Huh? How was that possible? How could HR control someone showing up or not? And, more importantly, if they could, why didn’t they before? Simple answer: we were not paying them to influence the outcome of their interview scheduling, so they were not doing it.
This cash-based cynical way of seeing the world is 100% real and you ignore it at your own peril. If you, as an entrepreneur, believe that everyone will do their best, in perfect alignment with the company’s overall goals just because they are told to do it or because they feel passionate about the company, but without any measurable reward behind it, then success will be much harder to come by. Pedro and I now have a variable salary component for every single role in the company. The bonuses are set based on the ultimate goal we have for each area. This includes IT, for example, where they get bonuses for % of systems uptime.
There are two key related areas where companies can trip up on this tactic: measurement and fairness. You can only set sophisticated results-based comp structures if you are actually objectively tracking all the variables. Most companies track sales, but how many track HR interviewee no-shows? Or internal systems uptime? Or average tenure of a call center employee tracked back to the original recruiter? (i.e. does one recruiter’s candidates last longer in the company? if so, pay them for it!). If you do not objectively and consistently track the data, then the variable comp becomes an exercise of subjectively determining the bonus and subjectivity oftentimes leads to dissatisfaction, exactly the opposite of what you want. So I would alter the above saying to “Tell what you pay me for, measure it objectively, and I will do it.” Not quite as elegant but more accurate to what you actually have to do to align everyone’s job to the venture’s goals.