Improving Teamwork Through Effective Compensation Design
Webster’s Dictionary defines teamwork as “work done by several associates with each doing a part but all subordinating personal prominence to the efficiency of the whole.” This article explores how to incorporate effective compensation design techniques to reinforce teamwork. The challenge is how to create this dynamic when there are several variables that influence the ability of a team to exhibit “teamwork.”
Managerial ability and training
Forbes (9/10/12) states that a manager’s relationship with an employee is the single most important factor in employee engagement. Disengaged employees are likely to be more disruptive and less productive. They are also expensive to the company by turning over more. Unfortunately, many managers were once “non-managers” whom companies promoted on technical or execution expertise as individual contributors. Bruce Tulgan, author of “It’s Okay to be the Boss,” claims that there is an under-management epidemic in the U.S. There are managers who are either not managing their people or managing them ineffectively. Effective managers focus on the work and do not reward all team members equally. They provide higher rewards for higher performance. Therefore, managerial and leadership training are essential to improve teamwork skill sets.
Employee ability, attitudes and biases
In order for an employee to contribute to the team, the incumbent must possess the appropriate skills to complete the job. Having employees who are not qualified or are the wrong fit for the position will make it more difficult to have an effective teamwork environment. Personality type, attitudes and biases also play a role. Are employees naturally altruistic or defensive and posturing? Teamwork can still exist with selfish individuals as long as the behaviors they exhibit contribute to team goals and outcomes.
Historical company culture
Companies tend to value certain aspects of their organization. In the engineering and construction industries, business developers may hold the highest esteem because they are revenue generators. In 2013, FMI Compensation statistics showed that business developer pay increases are in the top five of all jobs. Other companies value execution over sales, so project managers on showcase projects may carry prestige. In this case, owners may be the “sellers” and project executives, project managers and superintendents are the company heroes.
External threats and competition
The U.S. provides examples of teamwork during times of war and crises. Current political environments are highly partisan, but during the 9/11 tragedy, Hurricane Katrina and Superstorm Sandy, Americans dropped their political leanings to work together as a team to help others. Unfortunately, the effect does not last long. Companies may also respond to threats or significant competitors by having business units work more closely together to increase productivity, efficiency and innovation. Again, the heightened teamwork in response to economic or competitive threat may be short-lived without reinforcement such as performance management systems or structured incentive plans.
BALANCING DESIRED OUTCOMES AND BEHAVIORS
Effective compensation design can assist a company with its efforts to create a teamwork dynamic. The caveat here is that the compensation plan cannot act as a surrogate for good management. Under the premise of “people do what you pay them to do,” compensation design can reinforce teamwork behaviors to benefit the collective outcome of the organization.
Exhibit 1 shows a diagram incorporating three performance measurement levels: corporate, business unit/team and individual. Compensation design strategy on the weightings of these components must be unique to each company and reflect what the company wants to accomplish. A formal business strategy can provide direction for the compensation plan, but employee interviews and surveys are also useful tools to assess the current teamwork environment. For example, if employees indicate that everybody values individualism first or that business units compete with each other, then this is an indicator to increase teamwork. Weighting the corporate component more heavily over the business unit and individual measures would reinforce a teamwork environment. Conversely, if employees report that the company is like a socialistic Eastern European Cold War country and it does not matter if they perform any better, then it would be wise to shift weight to the individual measure in order to increase accountability.
What happens when the corporate measure is overweighted?
FMI Compensation has encountered profit sharing plan arrangements where the corporate measure was all that mattered. One employee stated, “My goal here is not to get fired. It doesn’t matter whether I work harder because I won’t get paid for it.” Therefore, there is the possibility that teamwork can be too dominant. All team and no business unit or individual accountability may result in “free-riding.” This term comes from economic theory and describes when a worker benefits from the rewards of others without the commensurate individual contribution.
What happens when the business unit measure is overweighted?
This problem occurs often in construction firms with diverse business units. FMI Compensation works with mechanical contractors where this is a frequent occurrence. For example, the Heating Ventilation Air Conditioning (HVAC) group may be competing or even in direct conflict with the plumbing group. There will be competition to put construction deliverables in place before the other group gets there first and blocks access. They may not even share ladders and tools, despite the fact that these resources are company-owned! Often, these business units have separate leaders, different employees (mechanical technicians versus plumbers), competing priorities to install equipment in a limited space and may have historical biases against each other. It is no surprise that all of the elements are here for conflict.
What happens when the individual measure is overweighted?
When the individual measure is overweighted, selfish or “me first” behaviors may appear. Many contractors use project-based incentives to increase productivity and profits. The weakness of the purely project-based approach is the risk of too much weight on individual performance. This is especially true if there are cost-saving or margin-gain commissions offered to project management. It becomes more about “my jobs” and “my projects” than about teamwork. Try to move a project manager from a high-margin project to a money-losing project where commissions are involved. The project manager or superintendent may claim to be too busy to transfer or offer significant resistance to assisting on other jobs. Honest supervisory incumbents may tell you that you are reducing their income when you assign lower-margin jobs to them.
There are successful ways to reward project success without resorting to commission-style plans. Using goal-based measures instead of commission-based measures usually solves the problem. For example, a project manager goal may be to average 2% margin gain over estimate on all jobs completed during the next 12 months. Another goal may be to reduce losses on a money-losing job. This way, a supervisory incumbent can still win, even if there is no margin in the job. The company benefits from minimizing losses and improving margins.
The right mix of team, business unit and individual measures provides the best outcomes. While it is desirable for owners and managers to have the corporate and business unit measures weighted more heavily, it is more desirable for employees to have maximum control through a heavily weighted individual measure. What does a company do with corporate employees who support many or all business units? Employees in human resources, finance, information technology, etc., would simply have two performance measures and not have a business unit measure.
In a recent FMI Compensation study, the majority of contractors reported having discretionary plans. Most discretionary plans obtain their funding from a “pool” of monies derived from a formula based on corporate performance. Then managers apply discretion at the individual level to determine final payouts. The problem is that employees do not know how much they will earn and do not know the path to earn more. They also cannot explain the amount of the payout they do receive. Structured incentive plans were found to be rated as very effective three times more often than discretionary plans. The use of defined performance measures in the three-performance measure model in Exhibit1 is an example of a structured incentive plan.
HOW TO USE TEAMS TO INCREASE PLAN DESIGN BUY-IN
An effective way to encourage teamwork and increase buy-in of your new incentive plan is to create a steering committee and a design team. The steering committee consists of ownership and senior managers of the company. This team evaluates and approves design team recommendations. The design team consists of business unit leaders and key managers or influencers in the business. Design team members interpret employee feedback, select performance measures, decide weightings of performance measures and determine performance standards (minimum and maximum achievement and payout levels).
REINFORCING TEAMWORK AND COLLABORATION THROUGH PERFORMANCE MANAGEMENT
In a recent Small Business Trends article (11/05/13), having no clear-cut goals is one of the mistakes to avoid when building a team. An effective performance management system allows a manager to create achievement goals or a managerial “wish list.” If teamwork is experiencing shared outcomes, then the team needs to know what it has to accomplish. Interim and final goals can be great reasons for team celebrations.
Here are some guidelines to implement a performance management system. The goal of this system is to manage overall performance, beyond purely production measures.
- Define strategy, values and vision. There is the formal business strategy, but what are the values of the company? Teamwork is often a stated and salient objective.
- Select the performance dimensions where the performance criteria will be built. For example, if teamwork is a value, then create criteria for employees to demonstrate teamwork.
- Set the measurement scale after selecting teamwork criteria. What defines below-average, expected and exceeds-expectation performance? The measurement scale will require anchors to define achievement.
- Include a section for employee talent development. Where are skills deficient? What training does the employee need to advance career prospects? Performance management systems are effective for identifying training needs without having to pay an incentive to make it happen.
Administratively, any company would be wise to invest in a system that would automate the performance management process. Unlike the incentive plan, these systems require robust documentation and tracking. To keep the system simple, FMI Compensation recommends to clients that managers have one meeting with each employee at least once per quarter to track progress. This minimal amount of communication should prevent surprises at the end of the year. Automated systems also hold managers accountable for managing performance.
Responding to external competitive threats is one way to bring employees together, but there are more proactive ways to do this.
- Invest in management and leadership training. Good leaders are also good learners, and continually developing people management skills is an ongoing process. Managers need to foster collaboration and build teamwork. They are the owners and creators of shared purpose.
- Determine if the right people are in the right jobs. It is not impossible to have successful teams with underperforming or selfish individuals, but it is certainly much easier when everybody can pull his or her weight and accomplish tasks that contribute to positive team outcomes. Many companies are beginning to weigh cultural fit more importantly than hard skills. Pick the right people with the right skills and attitudes or provide training for them to get there.
- Emphasize performance measures more at the corporate level to encourage increasing teamwork or at the individual level to increase employee accountability, depending on the company’s strategy and culture.
Structured incentive plans can encourage teamwork through their design. Use a bottom-up process where key leaders of the business make the initial plan design decisions for performance measures, weightings and performance standards (design team). Ownership or senior management (steering committee) should have final say on the design, but it should not autocratically impose the plan without field input or triangulation with the business strategy.
Whereas incentive plans provide rewards for meeting specific team-based goals, performance management can also reinforce teamwork. Performance management systems operate outside of the incentive plan and can reinforce cultural values. If teamwork is a cultural value, then rate employees on how well they support this value. Provide better merit increases to those who are team players. Send corrective messages to individuals who do not espouse teamwork.
You cannot do it alone — just ask any entrepreneur who started a successful business. The only way to grow was to work collaboratively and add more contributors to the team. This message is still true for long-established companies, especially in the ultracompetitive engineering and construction industries. ■
STEERING COMMITTEES AND DESIGN TEAMS GUIDELINES
- Should have five to eight members, including senior managers, leaders of key business units and the leader of the HR or compensation function at the company.
- Should include, but is not limited to, representatives from finance (often the CFO or controller), field operations (often COO), human resources, project management and estimating.
The purpose of the steering committee is to:
- Monitor the progress of the project.
- Advocate for the timely completion of the project, including pushing company personnel to complete tasks when appropriate.
- Review the work of the design team and revise if necessary.
- Receive the final deliverables and commit to implementation.
As a rule, these people need to have the ability to see financial statements, compensation for individual employees and bonus data. They should also be open and receptive to constructive feedback about human resources and compensation practices.
- Should be composed of five to eight mid- to senior-level managers, including leaders of key business units and the head of the human resources or compensation function at the company.
- Can have a one or two of the same members as the steering committee, otherwise known as “pivot members.”
- Should include business unit leaders, representatives from key functional groups and middle-level managers who are expected to rise in the organization.
Frank discussions of base compensation and bonuses will occur in these meetings. Choose employees you trust to keep this information confidential.
The purpose of the design team is to:
- Provide advice and suggestions on plan design assumptions and elements.
- Provide informed technical insights —company culture, elements to include, outcomes to target, etc.
- Generate team consensus on the preferred compensation plan design.
- Develop the recommended plan that will go to the steering committee for final approval.
This team should be authorized to view financial statements, compensation by employee and bonus data. It also should be allowed to hear interview findings.
FMI Compensation’s experience reinforces the value of collaboration and consequent buy-in of new incentive plans. When the owner simply tells employees, “I have this great new plan,” without any grass-roots involvement or buy-in, employees typically do not accept these plans as well.