Making Pay-for-Performance Work

A new incentive programme was instrumental to driving business results and culture change at Gates Corporation.

By Michael Switow

When the Gates Corporation hired Rick Goh to be its HR director for East Asia and India four years ago, the Denver-based multinational organisation was undergoing a cultural transformation following its acquisition by the Blackstone Group two years earlier.

Gates had become complacent. Sales agents rested on existing contracts instead of expanding into new market segments. Human resources was administrative, focusing on payroll and permits. Goh, a 20-year industry veteran who was leaving a leading role at China Aviation Oil, was hired to revamp Gates’ HR department into one that could drive business strategy.

One of the keys to this transformation would be a new sales incentive programme to motivate and reward Gates’ commercial team.

“When I joined Gates, we realised that the pay mix—the ratio between the fixed and variable components of compensation packages—was not ideal for a growing company,” Goh says. “As Blackstone had bought over Gates, we wanted to know that the people who remain with the company have the right culture to take the company forward. These are the employees that we want to retain. That’s the focus of our ‘pay-for-performance’ initiative.”

Setting the Framework

Determining the right pay mix is the source of much debate amongst Asian companies. What is the variable percentage that will optimise performance? The answer may vary depending on an employee’s responsibilities. Sales agents tasked with developing new market segments, for example, may need a higher reward to compensate for time and complexity.

For Gates, the answer was to phase in variable pay components, increasing them over time, whilst also taking into account a person’s role. The pay-for-performance approach can also be applied to non-sales personnel, with the achievement of more difficult goals rendering a higher payment. Regardless of the department involved, communication at this stage is key.

“You have to discuss and agree with employees about the goals and compensation structure before putting it into a package. If the expectation has not been set at the beginning, it will demotivate them,” says Goh.

Another source of debate is whether to incentivise individuals, teams, or both. The academic literature is divided on this topic, but an empirical study by Singapore Management University’s Centre for Management Practice, Pay for performance: What type of pay scheme is best for achieving business results?, indicates that team approaches as well as stretch targets yield better results. It’s important, though, to ensure that incentive plans are based on shared goals.

Transforming Corporate Culture

When Goh introduced pay-for-performance at Gates, he started with the East Asia and India sales teams. He took time to educate employees about the initiative, but he knew that the new payment structure was not for everyone.

“There may be free riders or people who are not hunters,” he says. “We let natural attrition take its course because the employees who don’t accept this kind of work method will look for work elsewhere. Then, when we free the head count, we can go out and hire the right mindset.”

Another layer of complexity comes into play with COVID-19. During a period of economic contraction and uncertainty, some companies argue that pay-for-performance initiatives should not adversely affect those sales agents who are focused on depressed segments of the economy.

“A sales-first mindset can damage customer relationships, especially with customers whose businesses are stressed,” write Kellogg School of Management Professor Emeritus Andris Zoltners and ZS Associates Consultants PK Sinha and Sally Lorimer in a recent edition of the Harvard Business Review. “Consider salespeople who sell software as a service to airlines. Salespeople who focus on aggressively pushing deals will not only be unsuccessful; they will appear tone-deaf.”

One way to address this issue whilst still motivating team members is to focus on the parts of the economy that are performing well. After all, economic contraction has not been uniform across the board. From an internal perspective, this requires measuring which sales teams generate the most revenue per person.

“Every month, I know my sales dollar per head count,” says Goh, who uses an Excel spreadsheet to track trends. “We have good data to justify where should we allocate the best dollar to recruit the right talent, especially during this pandemic situation.”

For Goh, that’s part and parcel of transforming mindsets, shaping corporate culture, and driving business returns.

Posted October 20, 2020 in Payroll

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