Step right up! I want to offer you an investment where for every $1 contributed you have the potential of earning $1,000! In fact, each dollar may have the potential of earning a million dollars! While this seems unlikely, or perhaps even impossible, it is true that money properly invested in driving performance can achieve these results. What if someone showed you a way for your company to invest $200,000 and drive returns of toward $2 billion? This would be multiplying your investment by more than 10,000 times! While this example stretches the possibility to its limits, it is not a complete fantasy.
Here’s the catch. Today a software “app” can be bought for a few bucks. A computer can cost less than a thousand dollars. These prices are driven by high volume sales and can mask the underlying cost of development. In today’s world of commoditized technology, we sometimes lose sight of the cost/value equation involved in a purchase.
This has become an issue with all types of human resource tools and services. As compensation evolves into an increasingly metric-based, performance-driven structure, we need to reevaluate the resources spent on these programs. In presentations and consulting assignments around the country, I often hear that effective systems and services are “too expensive” and implementation and administration are “too time consuming.” I seldom hear about the fantastic brainstorming that went to designing a new plan or, more importantly, the incredible results of a plan after it has been properly rolled out and communicated.
As industry professionals, it is essential we shift our paradigm, to focus on both ends of the “smiley-faced curve” that is often referred to in discussions on product delivery. (more on this concept) This type of curve shows the upfront costs and time put into a product (brainstorming and design), followed by the trough of developmental time and expense (implementation and administration), ending in the steep curve of success and profits (roll-out, communication and eventual payout).
Focusing on the entire smiley-faced curve may help us stay focused on real results over the long haul. It may also give us a model for “selling” our ideas to senior management and shareholders. As we gather evidence of success on the right side of the curve it will provide validation for future investments in performance management.
Consider each dollar invested in driving performance as a percentage of the potential payout to the group of individuals receiving compensation for their performance. Many executive compensation programs can see the value in performance-based payouts for all participants in the tens and even hundreds of millions of dollars. A 1% investment in a million dollars is a mere ten thousand dollars. If a company has a potential payout of $50 Million for a given program, a $200,000 investment should seem inconsequential.
Let’s look at this as an even bigger picture. If the same company has a $100 billion dollar market cap and increases its market value by 2%, the $50 Million compensation expense is worth $2 billion to the company! How much is justified in the areas of communicating, managing and administrating the compensation programs that helped drive this success?
Most companies invest surprisingly little in making their performance-based programs perform well. A relatively small investment can result in returns that can be difficult to imagine. Try the above exercise on your company’s compensation programs. A wise mentor often told me, “cost is only an issue in the absent of value”. Consider whether you have a strong evidence-based argument to increase your investment. If you do, make your case to management by showing them how you can provide a return on investment that is unlikely to be seen anywhere else.
Pay for performance will be the mantra for the next few years. Ensure that you are investing what it takes to get the most out of it.