APU Business Original

Variable Pay Initiatives for Employees: Using SMART Goals

Variable pay initiatives – an important element of variable pay models – include commissions, bonuses and other kinds of incentives. These incentives motivate employees to go above and beyond in their work and deliver better performance.

But in order for variable pay initiatives to be successful, the organizational goals to which they are connected must check a number of boxes. This tactic will optimize the chances that variable pay initiatives will motivate employees to do their best work and can be achieved with the use of SMART goals.

What Are SMART Goals?

SMART is an acronym originally proposed by George Doran, Arthur Miller and James Cunningham in the early 1980s. According to the Center for Civic Engagement at Bard College, SMART stands for Specific, Measurable, Attainable, Realistic and Timely.

The “Specific” component of the acronym means that a chosen goal must describe a specific kind of action to be taken or a specific objective to be achieved. When goals are too generic, their meaning may be lost in ambiguity or a lack of precision.

For example, suppose we create a bonus program for a grocery store manager. In order for that manager to receive the bonus pay, we might require that the manager do an exceptional job in managing their store.

A bonus program is one way to provide an incentive for employees to do their best work.

But what does “an exceptional job” really mean? This kind of language is too vague to allow a reasonable understanding of what exactly it is that the store manager must do in order to be eligible for his bonus.

So instead of this ambiguous phrasing, we might focus on a specific benchmark of performance, such as requiring that the manager improve the store’s financial performance. This goal is specific, so the manager will be better able to understand the desired outcome.

The next component of the SMART acronym is “Measurable.” “Measurable” means that a goal can be easily quantified and measured for clear understanding by all stakeholders. So for example, using the example of the grocery store manager and improving financial performance, this potential goal is quantifiable.

But it is first necessary to ask: What will that financial metric be? Would it be gross revenue, net profits, cost reductions or something else?

There are different ways to measure the financial performance of any store, so it is important that the metrics or key performance indicators (KPIs) we choose are clear and measurable. Using the grocery store example, we might decide to use gross revenue as a metric. As long as that financial figure is adequately defined, that would be perfectly fine.

Let’s next take a look at the fifth component of the SMART model, “Timely,” and then we will come back to the third and fourth pieces at the end. The timely element requires that there is a well-defined time parameter around a business goal to articulate when the desired performance is expected to be reached. So if we’re looking at gross revenue in our grocery store and want to see an improvement in that revenue, it would be necessary to determine the final date by when the manager should reach that goal.

Formal accounting is done at least on an annual basis (sometimes more frequently), and employee performance appraisals are also done annually. So a good timeline for our revenue improvement goal might be to give our grocery manager one year to accomplish the stated objective.

The remaining two components are “Attainable” and “Realistic”. And to a certain extent these two elements relate to the same general idea. The question here is whether the goal that is set is within realistic reach for an employee, assuming the appropriate and desired actions are taken.

So in other words, if our grocery store manager does all the right things, hires all the right staff, creates and enforces all the right policies, and makes all the right choices, is the goal that we set achievable for him? We can imagine scenarios where it might be, and scenarios where it might not.

For example, if gross revenue is indeed the metric by which we will measure our grocery store manager’s performance, and we agree to give our manager a year to reach the benchmark, we might set a goal of increasing year-over-year revenue by 10%. And that would probably be a target that is achievable through hard work and persistence on the manager’s part.

However, if we set the target at a 100% year-over-year increase in revenue in order for the manager to be eligible for the bonus, this probably would not be attainable or realistic. The reality is that very few businesses are able to double their revenues from one year to the next, barring extremely lucky and serendipitous economic circumstances that, if they occur at all, would certainly be outside the exclusive control of company employees.

So with such an unreasonable goal in place, we shouldn’t be surprised if our store manager simply throws his hands in the air and forsakes the bonus incentive altogether. If it isn’t realistically achievable and/or if the employee in question doesn’t believe it’s achievable, it isn’t going to be likely to motivate behavior.

Variable Pay Initiatives Must Be SMART to Be Successful

Variable pay initiatives and employee incentive programs can be an effective way of motivating employee performance. However, if incentives are to motivate workers, they must be specific, measurable, attainable, realistic, and time-bound to provide employees with the clarity and impetus to reach business goals.

Gary Deel

Dr. Gary Deel is a faculty member with the Dr. Wallace E. Boston School of Business. He holds an M.S. in Space Studies, an M.A. in Psychology, an M.Ed. in Higher Education Leadership, an M.A. in Criminal Justice, a J.D. in Law, and a Ph.D. in Hospitality/Business Management. Gary teaches classes in various subjects for the University, the University of Central Florida, the University of Florida, Colorado State University, and others.

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