In the face of dropping profits and changing economic circumstances, many organizations are taking a closer look at performance targets and, subsequently, how rewards are tied to them.

According to the Watson Wyatt report Effect of the Economic Crisis on HR Programs,  "Approximately one-quarter (23 percent) of companies have decreased their organization financial performance targets in the last 12 months. One-quarter (25 percent) will also decrease the organization financial performance targets in the next 12 months.” These findings are based upon data collected in April 2009 from HR executives representing 141 companies based in the United States.

When the market dictates that certain levels of success are no longer possible, understandably, organizational goals and targets need to reflect that reality. The challenge then becomes how to make sure that rewards are tied to the appropriate performance targets.

In the New York Times, Jonathan Glater reports that “Instead of paying bonuses to top executives when revenue or profits rise — less and less likely in this dark economy — companies have disclosed plans to offer awards based on other measures of success. A bonus may be more attainable if based, say, on preserving cash flow.”

This example represents a real shift in the definition of a desirable outcome, but it reflects intent to not penalize employees for circumstances out of their control. In this case, organizations may try innovative approaches.

Glater presents one idea when he quotes Mr. McCauley of the Florida State Board of Administration as saying “One way to ensure that hard-working executives get the bonuses they deserve is to include a relative measure of performance that compares results with those of competitors.”

Successfully linking compensation and performance can be challenging. Now it appears that this task may have become even more challenging.

Keeping a focus on profitability remains the main goal. Brian Dive writes in Strategy-Business, “When reviewing an employee’s role in an accountable system, three key questions should be asked: First, why does the job exist? Does it ultimately add value for the customers? (By “customers” we mean anyone who benefits from the organization’s work or products, including the patients of a hospital or the beneficiaries of a government agency.) Second, for what is this person held to account? Finally, how well does this individual fulfill that accountability?”

Do you have any ideas to share about how to successfully adapt a performance-linked compensation plan to the current economic reality?

References:

Dive, Brian. “Getting Rid of Grades to Boost Performance.” Strategy+Business [www.strategy-business.com]. April 14, 2009.

Glater, Jonathan D. “Companies Reset Goals for Bonuses.” The New York Times [www.nytimes.com]. April 17, 2009.

Watson Wyatt Worldwide. “Effect of the Economic Crisis on HR Programs.” [www.watsonwyatt.com]. April 2009.