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HR Roundtable ,Is performance-related pay just capitalist devil's work?'

24/02/2023 - On Wednesday, 18 January 2023, guest speaker Markus Milz spoke at the HR-Director-Roundtable in Düsseldorf on the topic of performance-based remuneration. The question was whether it is still up-to-date to set up systems that demand performance for corresponding financial incentives and which factors have to be fulfilled in order to successfully implement such a system in a company. Employers nowadays have to make great efforts to remain attractive for employees and to attract qualified professionals to their own company. Given the fact of the massive shortage of skilled workers and the high willingness of employees to change companies, this is no easy task.  

According to speaker Milz, one thing is certain: Every second employee would change employer for a better variable pay system.’ To underline this thesis, Milz presents the results of a survey among 318 companies, which shows that employees' satisfaction with their own remuneration model could be increased by 60 % by introducing a performance-based remuneration.  
More than half of German companies use the performance-based remuneration model and 94 % of managers and directors have been receiving variable salaries for a long time. Ideally, with the introduction of this system, managers succeed in leading their own employees in a goal-oriented manner while at the same time giving them as much freedom as possible in implementing their goal achievement.  
What companies additionally expect from the introduction of the performance-based remuneration is

  • a raise in employee motivation  
  • an increased identification of the workforce with the company's goals,  
  • an improved productivity,
  • enhancement of product quality and  
  • a reduction in staff turnover and personnel costs. 

As a final result, performance-related pay should have a positive impact on the competitiveness of the company.

Success criteria for the introduction of performance-related pay  

Once a company has decided in favour of the performance-related pay system, some criteria should be taken into account to ensure that it can be successfully implemented in the company. One important factor is to take the experience and individual knowledge of all employees and make it available to everyone. This creates an understanding of what their own areas of responsibility are and how to implement them in the best way possible. 
In addition, employees should be coached personally and individually, depending on their experience, knowledge level and motivation. A team usually consists of members with different levels of experience. Milz remembers a conversation he had in his position as a trainer with the HR director of a medium-sized company. In his team there were five ,old hands’, five ,young stars’ and 20 of the employees were ,somewhere in between’. Milz explained the following scenario: ,Imagine there is a two-hour English course for the entire team and half of the employees are native speakers and the other half do not speak English at all. Half of the team would be bored and the other half probably wouldn't understand anything I'm explaining. Because if I don't pick up everyone where they are and give them what they need at the moment, it can't work.’ Individual training sessions therefore ensure that all employees can do their work in the best possible way and are given the necessary tools to do so.  
Furthermore, it is necessary to create the right incentives to defined action goals to ensure optimal, self-selected outcome goals of the employees. The result should be that everyone sets and achieves their maximum goals. In particular, the weighting of the individual target values must be set appropriately. It should be based on at least two pillars and guarantee a separate assessment of performance and success. The weighting can be redefined each year, ideally depending on the experience of an employee. At the beginning of an employee's career, the potential for improvement is very high and the incentive of performance-related pay is great. The system always remains constant, but can be adjusted over time by varying the value of the individual pillars. Adjustments should always be determined by the employee himself. The key to an optimal design of the performance-related pay therefore lies in empowering one's own employees to set realistic result targets for themselves. 

Effective target agreement for performance-related pay  

In practice, target agreements often take place in such a way that the boss wants to pursue an enormously high target and the employee tries to push it as far as possible. The challenge for managers is to get their own staff to make an honest and realistic self-assessment. If the target agreement is exceeded, the bonus increases, but not as much as if the staff member had committed to a higher target right away. Explicitly, this means that the maximum bonus is paid out if a high target is agreed upon and also achieved - true to the motto: Choose your target yourself, but know the consequences of doing so. In this system, ambitious but achievable goals and correct self-assessment are rewarded. On the other hand, over and under estimation as well as misjudgements are punished. Quantitative measures such as contribution margin, turnover or annual surplus should be used as a basis for assessing target agreements. An alternative would be a point system that defines exactly which points are achieved for which performance. 

The right targets are important  

Performance-based pay only works if the defined targets are clearly measurable, unambiguous, relevant and can be directly influenced by the employee. Targets must also be consistent over the long term and must not be conflicting. Thus, it should always be discussed directly with the employee which goals he or she considers realisable. For example, what market share has already been developed in the case of a salesperson and what market potential he or she is still able to develop accordingly. If the open market potential does not correspond to the result goals, these can be classified as unrealistic from the outset and must therefore be discarded or modified.  
In the end, the employee always knows best what he needs to achieve the highest possible goal,’ says Milz. In this way, the right path can be discussed and smoothed out together right from the start.  

Reward success fairly or leave it at that  

Instead of rewarding your staff with a very low performance-related bonus, however, it would be better to show employees the company's appreciation in a different way, for example by praising them. According to Milz, an appropriate share of the variable portion is at least 10-25 %, in sales it tends to be even higher - anything less can have a counterproductive effect on employee motivation.  

Open and honest communication   

The crucial factor for the success of the performance-related pay system is its acceptance by the entire workforce. Therefore, it makes sense to involve the HR development and technical departments as well as the works council in the introduction phase. It is particularly helpful to form a representative group of the workforce and ask them for their opinion. In this way, a fair system can be created together. ,The employees should have the conviction: This is our system’, Milz knows. It is also important that the model is as simple as possible so that there is a common understanding of it and everyone knows how to assess their own advantage. In this way, the satisfaction of the individual employee can be increased and productivity and product quality can be raised.  
What Milz hints at in his presentation: financial incentives alone are not decisive for the right mindset of employees. Performance-based compensation can create the necessary motivation among employees and be used as a kind of management and control tool, but care should already be taken in the application process to ensure that employees fit the company and its goals. Only then can the use of a performance-based remuneration model work.  
Director of the German headquarters of Robert Walters and organizer of the HR-Roundtable event, Thomas Hartenfels: ,We would like to thank Mr. Markus Milz for his interesting lecture and the numerous tips on the implementation of performance-related remuneration at our HR-Roundtable. What all attendees were able to take away from his presentation: Performance-related pay, when applied correctly, can demonstrably increase the satisfaction, motivation and productivity of employees and reduce fluctuation, which improves the competitiveness of the company.’ 

About the Speaker   

Markus Milz has been acting in his role as Managing Partner of Milz & Comp. and BERGEN GROUP for over 22 years and is considered one of the top 100 keynote speakers. The passionate business expert is happy to share his in-depth knowledge of innovative methods and approaches in the specialist areas of strategy, leadership and sales as a consultant, trainer, speaker, best-selling author and lecturer at the SRH University of Applied Sciences in Heidelberg.  

If you are looking for the right people and would like to draw on the expertise of our experienced recruitment consultants, please contact our recruitment expert Thomas Hartenfels or submit a job specification.

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