Workforce.com

You Get What You Pay For

January 30, 2008
Townsend Wardlaw would rather write a salesman a $200,000 check on a $1 million deal than pay half of a $95,000 base salary over six months and have nothing to show for it. Wardlaw agrees it’s a lot of money, but he thinks it’s worth it.

    "Not only do we get what we’re paying for, but we get better results," says Wardlaw, founder and CEO of Three Value Logic Sales in Denver.

    The method Wardlaw uses with his sales force is called activity-based compensation. It’s a form of variable pay where part of employees’ base pay hinges on specific goals. At Wardlaw’s sales outsourcing company, employees receive the cash rewards for their hard work on a quarterly basis.

    It’s a compensation strategy built right into an employee’s base pay that companies can use to achieve long-term goals by setting short-term objectives. Employees get paid when they deliver on the immediate needs of the company.

    About 10 percent of a salesperson’s base salary at this Denver company is tied to specific quarterly goals, including number of calls, meetings and landing new opportunities. Wardlaw says it’s his responsibility to set clear expectations, but each salesperson needs to hit those marks to earn their full base salary. Salespeople who meet those short-term goals have the potential to double their earnings through additional bonus pay.

    Activity-based compensation protects the company cash since the company isn’t paying an employee’s full salary without seeing results Wardlaw says.

    "It gives [employers] tangible value for their money," he says, adding that the company has been paying its employees this way for about three years.

    Meanwhile, Affiliated Computer Services Inc. is working to incorporate activity-based compensation into the base salary of each of its 60,000 employees. ACS created its program from scratch about 10 years ago, and keeps the details closely guarded. Tom Blodgett, president of ACS’ Business Process Solutions Group, says the program improves productivity, work quality and employee satisfaction, and offers myriad other benefits.

    "It allows us to be more competitive, enough to make a difference in winning deals," Blodgett says.

    ACS, a worldwide business process and information technology outsourcing company based in Dallas, gauges employee performance on the quality and quantity of work, in many cases. Blodgett says four or five measurements usually are set. If needed, the sophisticated program can change the criteria each pay period. Most employees on this pay schedule can check their performance daily. Paychecks can fluctuate depending upon how well employees meet or exceed the goals.

    To have a successful activity-based compensation program, employees need to understand the metrics and how they influence their results, as well as to see how they’re doing, says Steve Gross, global broad-based performance and rewards consulting leader with Mercer. Plus, employers should offer a minimum of 10 percent of the employee’s salary.

    "If you don’t put something on the table [an employee] can do something with, then you’re not going to motivate [the workforce]," Gross says.

    Employers also need to measure the right thing, observers agree. Generally, employees will do what they are told, Wardlaw says.

    "You need to do your job as a leader and define success, as opposed to waving a wand and expecting it to happen," Wardlaw says. "Then you need to pay for that contribution to success."

    If an organization measures something like an average handling time, Gross says, they need to be careful that specific measurement doesn’t encourage employees to skimp on delivering high-quality services.

    "It isn’t a bad metric, but you can send the wrong signal," he adds.

    But once accurate goals are set, results should pour in.

    At ACS, one group that handles benefits for a client saved about 23 percent more than what was projected. Work quality rose five percentage points to 97 percent and productivity increased nearly 30 percent. While Blodgett would not divulge any more details on this group, he did say these results are typical of ACS employees on activity-based compensation.

    "We feel our workforce is the cream of the crop in terms of productivity," Blodgett says.

    Another added benefit, many agree, is that most low-performing employees leave the job before the company needs to fire them. Because those employee aren’t making the money they expected, they usually go elsewhere.

    "On initial implementation, turnover is higher," Blodgett says. "Not everyone can handle it."

    Recently, ACS was in the news over a public confrontation between its chairman and certain board members. Five board members quit, and in early December, ACS chairman Darwin Deason agreed to amend his employment agreement, curbing his right to appoint specific officers and capping his voting power on his outstanding shares.

    While Blodgett admits it was a tumultuous episode, many ACS employees stayed on task. Sales "may have paused" he said, but new business is picking up significantly. The company is on track to grow revenue to $10 billion by 2010, he added.

    Although the company didn’t track the effect of this issue on its employees, those who are paid based on their productivity levels have historically been high performers whose efforts help improve the bottom line. The company’s annual report showed an 8 percent increase in total revenue in 2007, rising from $5.4 billion in 2006 to nearly $5.8 billion last year.

    "ABC is so effective and so fair, the more people we can get on it, the better," Blodgett says.