Key Question: Is Your Bonus Plan About Creating or Distributing Value?

I had a great conversation with a client yesterday who is working to shift her organization’s employee bonus plan from a purely discretionary one to one which will more directly engage employees in making the organization better.

This is an enormous change, as those of you who’ve done it or even contemplated it know. It goes right to the heart of the employee’s relationship with the employer — and to the core purpose of the pay program.

We talked about ways to have a conversation about this shift with top executives. I like to do it by positioning plan approaches as either value distribution or value creation in purpose.

  • A value distribution plan is one where you budget or set aside the monies necessary to fund current award amounts, and then work to devise the best possible design and measures to use in distributing those funds.
  • A value creation plan is one which strives to create economic value by improving one or more aspects of organization performance, and then provides a mechanism by which some part of the value generated is shared back with the workers who helped make it so.

Why value creation will drive more performance improvement

This is not just a matter of semantics. While the two approaches can sometimes be difficult to distinguish by plan mechanics alone, they are different in significant ways.

A value distribution plan is a reward plan.

A value creation plan is a business improvement plan, and as such is wider and more ambitious in its scope, operation and impact. It involves compensation, yes, but it goes beyond that by seeking to involve employees in improving the operations of the organization. As such, its implementation demands greater levels of communication, information sharing, education and participation.

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Value creation is the taller order, for sure. It is also the one more likely to generate genuine organizational performance improvement.

The trick, of course, is being clear and honest about which one you’re choosing. You can’t do the first and expect to get the results of the second. Value creation rarely happens in a big way simply by changing the way you distribute compensation dollars – and not changing how work happens.

See Ann Bares talk about A Look at How We Reward the Work of  Today — and Tomorrow at TLNT’s Transform conference in Austin, TX Feb. 26-28, 2012. Click here for more information on attending this event. 

This was originally published on Ann Bares’ Compensation Force blog.

Ann Bares is the Managing Partner of Altura Consulting Group. She has over 20 years of experience consulting in compensation and performance management and has worked with a variety of organizations in auditing, designing and implementing executive compensation plans, base salary structures, variable and incentive compensation programs, sales compensation programs, and performance management systems.

Her clients have included public and privately held businesses, both for-profit and not-for-profit organizations, early stage entrepreneurial organizations and larger established companies. Ann also teaches at the University of Minnesota and Concordia University.

Contact her at abares@alturaconsultinggroup.com.

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