Incentives and Strategy execution

1. The Importance of Basing Incentives on Achieving Results, Not on Performing Assigned Functions: To create a strategy-supportive system of rewards and incentives, a company must emphasize rewarding people for accomplishing results, not for just dutifully performing assigned functions.

CORE CONCEPT: It is folly to reward one outcome in hopes of getting another outcome.

2. Incentive compensation for top executives is typically tied to company profitability, the company’s stock price performance, and perhaps such measures as market share, product quality, or customer satisfaction.

3. Which performance measures to base incentive compensation on depends on the situation – the priority placed on various financial and strategic objectives, the requirements for strategic and competitive success, and what specific results are needed in different facets of the business to keep strategy execution on track.

CORE CONCEPT: The role of the reward system is to align the well being of organization members with realizing the company’s vision, so that organization members benefit by helping the company execute its strategy competently and fully satisfy customers.

4. Guidelines for Designing Incentive Compensation Systems: The concepts and company experiences discussed yield the following perspective guidelines for creating an incentive compensation system to help drive successful strategy execution:

a. The performance payoff must be a major not minor piece of the total compensation package
b. The incentive plan should extend to all managers and workers, not just top management
c. The reward system must be administered with scrupulous care and fairness
d. The incentives should be based only on achieving performance targets spelled out in the strategic plan
e. The performance targets each individual is expected to achieve should involve outcomes that the individual can personally affect
f. Keep the time between performance review and payment of the reward short
g. Make liberal use of non-monetary rewards – do not rely solely on monetary rewards
h. Absolutely avoid skirting the system to find ways to reward effort rather than results

5. Once the incentives are designed, they have to be communicated and explained.

CORE CONCEPT: The unwavering standard for judging whether individuals, teams, and organizational units have done a good job must be whether they achieve performance targets consistent with effective strategy execution.

6. Performance-Based Incentives and Rewards in Multinational Enterprises: In some foreign countries, incentive pay runs counter to local customs and cultural norms.

7. Thus, multinational companies have to build some degree of flexibility into the design of incentives and rewards in order to accommodate cross-cultural traditions and preferences.

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