Tying goals to compensation

Pitfalls and a better approach.

How do you determine pay raises or bonuses from goals? A simple approach is to wait until goals have been rated and use that rating to determine the variable part of a compensation.

Think twice: most goals are actually a bad fit for this. What do you think happens when you ask people to come up with the targets they need to meet to get their bonus or raise?

Employees Setting Goals
Employees setting goals in preparation for their bonuses

Yep. It's human nature and is actually the rational thing to do for employees. They set targets that they know they can meet. So what are you to do?

Of course, managers could check employees are not sandbagging but it puts the burden on your managers and assumes they always know best. It also removes the employee buy-in from the process: the employee should "own" the goal. In addition, your hidden high performers now have an incentive to remain hidden for a short term gain. You won't coerce anyone into becoming a high performing employee by raising their targets. Give them the means to express their talent and the room to try out new things.

Left Brain Effect

There is an even more compelling - yet often ignored - reason to keep goal ratings and compensation separated: it has been found repeatedly that the higher the reward the worse the performance for creative tasks (creative is loosely applied here.) We recommend you watch this talk from Dan Pink. On top of being entertaining, it should resonate with a lot of HR folks.

When It Works

There are two categories of goals where the drawbacks mentioned above are minimal:
  • Task-based goals where the task is well-defined and nothing other than the task is expected from the employee.
  • Goals where only the result matters. This is traditionally the case in sales functions.
In these cases, we recommend a mixed approach: determine the bonus based on metrics-driven goals and let employees add inspirational goals.

So What to Do?

  • Don't use goal ratings directly in a performance evaluation: the final performance rating should not be your goal rating. Make sure employees know this is the case.
  • Don't punish employees who miss really ambitious goals. It doesn't mean you should compromise on low performance but rather that you should aim high.
  • Do use goals as a talking point during a performance evaluation. Consider how the goal was executed by the employee and the team.
  • If your evaluation process involves peers, consider sharing individual goals at least with peers.