Rewards - The "R" in continuous improvement

In continuing to explore a framework for driving sustainable continuous improvement in operational performance management, I'm taking this opportunity to outline the most critical, and often most difficult element of the Expectations-Capabilities-Rewards "ECR" model discussed in a previous entry.


There has been no shortage of press coverage recently about executive compensation. Even before the AIG bonus debacle of late, terms such as “performance pay’ and ‘retention bonuses’ have become a regular part of the business press vernacular. While we can all debate the ethical, moral and logical merits of these compensation practices, when an organization is implementing a performance management system to drive sustainable continuous improvement, the total reward system, not just compensation, is the most critical lever of change.

However, unlike these currently accepted pay practices, particularly in the financial services industry, reward elements within an effective performance management system don’t just translate to paying people more. The crux of an effective reward system is the alignment of rewards, recognition and compensation to the strategic goals of the organization - paying employees for the desired behaviors.

As example of a misalignment of rewards with corporate strategy; a personal experience. In a past role, I joined a $300mm public software company to launch a value-added services business unit. The CEO’s strategy was to transform the company from a hardware & software seller to a services-led solution provider; eventually generating +60% of revenue from services. The CEO was making significant investment throughout the organization in this transformation. However, there was institutional resistance to changing the sales compensation plan in order to drive sales people to focus more on selling these services. While corporate leadership was investing in service capacity, training sales people how to sell services and promoting this new value proposition in the press and to the investment community, sales people had no quota for selling services, received no quota relief and had no bonus kickers for including services in their software deals. The result? The strategy failed. Officially, the executive committee decided to refocus on software licenses, acquiring two other software firms two years later. But it was clear that the refusal to change the incentive comp plan contributed to this failure.

While traditionally the most difficult element to evolve, in order for any change to sustain within an organization, the rewards and recognition system must align with the expectations and strategy in order to drive the desired behavior that results in improvement in the new KPIs.

Alignment beyond Metrics

When evaluating improvements in operational performance management, many focus on insuring that the metrics, KPIs and measures are aligned with the corporate strategy. We want to exel in customer intimacy so one of our KPIs will be CSat scores. This is a valid starting point but what happens once the 'right' metrics are established? KPIs are indicators, goals, targets. How then does the orgainzation align itself to those metrics and move them in the right direction?

A simple framework for consideration is the E-C-R model: Expectations, Capabilities & Rewards. Alignment needs to extend across all these components of the operating model. KPIs are expetations; this is what we state is important to the business and will measure our alignment with our strategy. In order to move those KPIs in the desired direction, the organizational capabilities need to be aligned to those goals. Everything from human capital skills, technology, plant & equipment, business processes need to be evaluated and, most likely, retooled. We can't implement CSat as our KPI and rely on the same call handling processes that leave customers' issues unresolved but optimize AHT. Finally, the most critical and most challenging component is the reward systems. From cash compensation to promotions, career pathing, and public recognition, the "R" will ultimately be the driver of change. If the company is in a mature market, with a KPIs of market share and customer profitability, then why is the sales comp plan still focused exclusively on new logo acquisition and bookings?

Don't underestimate the change management required to implement an effective operational performance management system, aligning metrics to strategy.