In 1997, a reorganisation of compressed gas supply business led to an improved financial information system. This, in turn, made possible the identification and measurement of profitability right down to individual functions and post-holders. Up until that time, the company’s pay mechanisms had been built up over time with extra elements being added on as required but without obsolete elements being jettisoned. This meant that the variable element of the pay bill comprised an array of sometimes obscure payments, incentives and bonuses that were only partly understood by managers and employees and there was no mechanism for reflecting profitability or individual contribution in the variable pay system. The range of payments between high and average performers was small, there was no account of contribution by teams of employees and it was clear that the reward system had a short-term focus.
The new scheme was designed to include the following elements:
■ A significant element of the incentive pay would be the achievement of profit targets. For example, for sales representatives, 70% of their incentive pay would be based on their own territory profit (not their volume of sales) and 30% on their area team’s profit.
■ There was no upper limit on what the individual might be paid.
■ Under-achievement of profit targets would attract no payment.
■ Employees would have extensive feedback as to their own and their team’s performance and likely incentive pay outcomes.
By basing incentives on robust measures of profitability, it meant that employees would be focused on a collection of behaviours, including building up customer relationships, rather than just selling volume. An evaluation a year later found that employees had a good understanding and acceptance of the scheme and that profits were above forecast. More important, managers reported that there was a discernible improvement in the profit orientation among employees.
