Team-based compensation - Is it the answer?

I guess that depends on what the question is!  Almost invariably one of the first questions that a prospective employee, whether manager or staff, is interested in getting an answer to is "How much will I be paid and how will I be rewarded?"  There is no doubt that other factors come into an employment decision for any individual - what kind of work will I be doing, who will my supervisor be, who else will I be working with, what's the reputation of the work unit, etc.  But all of us have a base interest in what our compensation will be.  And most of us are also interested in knowing how good performance will be rewarded.

Organizations - and leaders - are even more interested in how their compensation systems impact their bottom line profit/cost performance; how the compensation system allows them to attract, retain and motivate staff; and, how a compensation system helps the organization deliver on its key business objectives. 

Historically, most organizations and leaders have operated with a philosophy that individual performance dictates individual reward.  Increasingly, however, a number of shortcomings have been identified with that approach, most notably that it can set up unhealthy competition between staff and between business units - what might be good performance for one area of the organization might negatively impact the ability of others to perform, and might limit the ability of the organization to achieve overall goals and objectives.

Enter team-based compensation.  The idea is that pay or bonuses (or both) become tied to the organization's overall achievements.  The intent is to shift a culture that perhaps encourages a me-focused perspective to one that is focused on team or broader organizational achievement. 

Making such a shift in compensation system is not to be underestimated.  There are at least two fundamental requirements to make that shift successful and there a number of issues to be managed in the transition.

First, a team-based compensation system requires that a well-articulated set of performance goals and metrics be established for the organization.  These could take any number of forms and might include service goals, budget targets, productivity measures, etc.  Regardless of form, they must be well-defined, broadly communicated, and their connection to pay/bonuses well understood.  If this first step is not done, or is done poorly, an effort to implement team-based compensation is unlikely to achieve desired results if not fail completely.  Without this clarity up-front, managers and staff will at best be confused about expectations or at worst may continue to evaluate their compensation/bonus received against the old model of compensation.

Second, and just as critical, is a need to actually evaluate and manage performance against the new team-based model of compensation.  Once announced or implemented, the work for leadership only really begins.  Leaders now really need to step up to the plate to ensure that the new system is implemented, that performance to the overall objectives of the organization becomes paramount, and that compensation/bonuses directly connect to performance.  If that transparency and linkage is absent the system will rapidly lose credibility. 

There are a number of issues that I believe need to be considered and managed in a team-based compensation system.  First, is the amount of the team-based bonus going to be equitable for all levels of the organization, i.e., same percentage opportunity for all or not?  If not, disincentives for performance may be built in to the system right from the start.  Leaders may need to commit to truly being part of the organization in this very visible way as it lends credibility not only to the compensation/bonus system but to a variety of other organizational initiatives and leadership pronouncements.

Second, leaders need to consider how they can incent innovation and creativity from individuals if only team-based performance is going to be rewarded.  If the efforts of one individual or team contributed to a particular organizational success, but all business units get to share in the gain that is ultimately distributed, will similar individual efforts be forthcoming in the future?

Third, and related to the above, how will a team-based compensation system manage those individuals or business units who consistently don't contribute to the achievement of team results?  In this context, it's not usually the really poor performers/business units that present a challenge in management.  Their lack of performance is usually so poor that management (should) become relatively easy.  Of greater concern is a need to motivate everyone to the same high level of motivation and achievement relating to organizational goals.  This is where regular (more than annual) and rigorous performance management comes into play.  This is where strong leadership and commitment are necessary.  If such does not exist then it becomes all too easy for low or average performers to ride on the coattails of high performers with all getting the same team-based bonus.

Finally, there is an equally contrary need to manage excessive or unhealthy peer pressure that may arise from a team-based compensation/bonus structure. There may be very legitimate reasons for an individual/business unit not being able to contribute in a substantive way to achievement of key organizational objectives in a given reporting time frame.  If a team-based culture - supported by a team-based compensation system - is well established, articulated and supported then such issues can be managed easily enough.  This is particularly true if transparency and sharing of issues is part of a well-established organization culture. 

From my perspective the type of compensation system chosen by an organization is important but of less consequence than how it is implemented and managed on an ongoing basis.  For any compensation system to succeed leadership must be there from day one and through its day-to-day management.  There are no simple solutions.  It's About Leadership.
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Greg Hadubiak, MHSA, FACHE, CEC, PCC
TEC Canada Chair/Executive Coach/Senior Consultant
hadubiak@wmc.ca

Helping leaders realize their strengths and enabling organizations to achieve their potential through the application of my leadership experience and coaching skills. I act as a point of leverage for my clients. I AM their Force Multiplier.