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Chatter Central The merit and efficacy of incentive pay


Periodically, eClub News looks at some of the discussions taking place online in social media, the blogosphere or otherwise on the web.
In this issue, a discussion held in the LinkedIn group of Club Advisory Council Internationale, hosted by Search America, offers a thought provoking look at incentive pay. As payroll will likely remain the largest expense in the budget of every private club from now until the end of time, this online chatter around this topic seemed noteworthy.

A slew of comments were provoked by the following question:

Bonuses based on objective or subjective criteria: Incentives are intended to drive performance beyond expectations contained in basic job descriptions. Do they?

Interestingly, one of the first commentators to respond came from the management company perspective:

I have consistently recommended the implementation of performance based compensation agreements for all of our Legendary partners and ClubCorp built a successful organization doing the same. I am amazed at just how many club[s], course[s], and resorts, I speak with simply have a base pay for all of the key individuals, specifically the general manager, as well as the department managers.

The alternative is a "pay for performance" compensation plan! And once a sound "pay for performance" compensation plan is put in place, an amazing transformation occurs! The transformation is sudden and impactful! It creates a buzz in the club. It gets everyone's attention. And it is not without pain. It initially scares the heck out of the staff. And it weeds out those that have no interest in being held accountable to a performance standard very quickly.

Suddenly, pay is dependent upon producing results, not just showing up for work. Suddenly, spending money does matter. Suddenly, that lead for an outing, a new member, or a private event takes on new importance. Suddenly the staff is now the owner's partner in the success or failure of a club or resort instead of just an interested bystander.

Suddenly the key staff has a stake in the business outcomes and begins thinking and acting like an owner, like someone whose personal financial situation is dependent upon the results of the business, because it is!

For non-sales positions I recommend having 20 percent to 35 percent of the total compensation package based on achieving specific quantitative and qualitative results. I establish, measure, and reward, or not, the results on a quarterly basis. For sales people, 50 percent to 75 percent of their compensation potential should be related to the achievement of sales goals, if specific goals even exist. It's the difference between "show up for work" pay versus "perform to a standard" pay. It makes the outcomes of the business important to all the key people and puts everyone at risk financially instead of just the owner.

While many clubs have not yet adopted such a performance incented salary structure across the enterprise, more clubs are attempting to reward behaviors that are consistent with their strategic plans and visions. Club management professionals should reflect on how they can expect to achieve the goals outlined in their strategic plans without rewarding employees for working toward those goals. Employees are unlikely to offer this form of dedication to the vision of the club without clear guidance and expecting them to know the goals without communication is a precarious path to take.

Along this theme, another commentator noted:

What gets measured gets done. In 30 years of supervising up to 30 employees at a time, I found plenty of traps in assessing performance "subjectively." Give Emily a 5% bonus based on less than precise measures and Joe, who receives 3%, complains (quietly, perhaps, but that is worse because it will spill over into performance unless you "talk it out"). Maybe the problem is semantics and the word "subjective." We used financial and non-financial objectives for both merit increases and bonuses; the non-financials were project-oriented (e.g. produce a marketing brochure in four languages to support the sales force). Leaving bonus distributions to a supervisor without clear goals with clear assessments is guaranteed to breed claims of favoritism, real or perceived.

Another comment that evoked a smile provides a return to the basic premise of why a club exists in the first place—for the benefit of its members. McGladrey professionals have often argued that too many clubs change their mission to suit their budget instead of budgeting for the mission, and with the current clamor for so many flavors and variants of operating and other financial metrics, this commentator's observations provide a welcome reminder of how to drive financial results—by understanding the basic tenets of a private club's business model, which demands understanding what members want and then perfecting internal process to deliver.

In answering this question it depends upon the type of club. I agree that performance based compensation is right for building and maintaining a "financially" driven organization. However, I suggest that subjective criteria may be appropriate for a "member" driven organization.

Our club's membership is limited to 264. I cannot increase membership, and we do not cater to outside events; as a result, a financial incentive based upon sales increases would prove frustrating if not detrimental. In addition, I am expected to ensure the club matches the expectations of a very discerning membership. This requires a high pour cost, exceptional food and mind-blowing service. Moreover, it all must be done without a demonstrated effort on our part. If my first concern were financial, it would be very difficult to pull this off. However, if you take care of the members (read "member driven club") the finances will follow. We provide warm cookies after lunch, I suppose we are hurting dessert sales, but the members seem to appreciate the effort and they continue to show up for lunch.

Every club must pay its bills. Moreover, if I may paraphrase Adam Smith, "it is not the benevolence of the manager that he provides meat for your table." We all expect to receive a wage for our efforts. However, "pay is dependent upon producing results, not just showing up for work". In our environment those results are more subjective in nature.

Each year I write a list of objectives. I ask and receive the same from the department heads to ensure everyone is on the same page. I then provide a copy to my incoming president who may or may not add something. The only financial objective on this year's list is to "meet the budget." The rest are soft objectives such as "creating a better new-member orientation." The needs of this objective are defined, but there is not a definitive line where we will have achieved this objective – we continue to work on this year over year. The benchmark remains subjective.

Soft objectives allow for incremental as well as organic improvements over time. It allows us to serve our members without the distraction of whether it is going to cost us financially. Each new member receives a better experience as we pay attention to how he uses his club. Each dinner is an improvement upon the last one we served; perhaps we added (or removed) a strawberry from the plate. As a result of soft objectives each member experience builds upon the last.

If the first topic in our staff meetings were about the costs, before we discussed the member's experience, we would reduce ourselves to operating an institution – I take great pride in the fact we serve a membership.

At the end of the year, we look back at how we improved service and likewise improved the club. It remains subjective in our tight knit little community. We have the budget as the objective benchmark. But in the context of this discussion, it is important to note that there is no incentive to exceed the budget for our own personal gain. The real incentive is to exceed the member's expectations while working within the budget; that benchmark remains subjective and determines bonuses at the end of the year.

The heart of any club is its members. The board and management together form a brain. Meanwhile, employees are organs, muscles, ligaments and even limbs. Consider how often a body can accomplish a task when less time is spent deliberating. Once beyond a certain stage of development, micromanaging how to walk can often lead to an awkward and inefficient process. It is as if the body's limbs, muscles, etc. know what to do best when left to their own devices. Having said that, a body will never arrive at is destination without a cognitive desire to move in a specific direction. It will also be less likely to continue reaching new destinations without some reinforcement—continuous movement and sustenance.

In essence, goals must be outlined and a clear message to move in a direction must be communicated throughout the body; recognizing progress should be rewarded by building upon those the strength that is developed and toned; and all of this should be balanced to avoid deterring advancement in the future.