Heads Up: This is the second article of a series about variable compensation models and how businesses can use them to align employee compensation and overall business performance. In the first article, we discussed the importance of employee scorecards and how to create them. You can read that article here. Before continuing, you should have a firm handle on how to identify key activities, success metrics, and core processes, all of which were covered in part 1.
What's the difference between a good target and a bad target? A good target is specific, measurable, achievable, relevant, time-bound, and most importantly, valued by the customer. The customer can be internal (like your boss or colleague) or external (like a paying client or vendor). The customer is whoever consumes the output of your work and benefits from the outcome of your work. Once you've identified the customer (the specific individual) you should work with them collaboratively to set targets for success metrics.
Work with the Customer to Define Success Metrics
Success metrics are points scored. They are the extra points, field goals, and touchdowns that the team scores throughout the game. In the screenshot above, we identified web traffic from public relations sources (% growth) as a success metric. The next step is to work with the customer to determine what percentage is a field goal-level outcome vs a touchdown-level outcome. A field goal level outcome might be 5% growth over some time horizon. A touchdown-level effort might look like anything over 12% percent growth. The key is to work this out with the customer beforehand so that there is no confusion about what success looks like.
Use the Success Targets to Derive Targets for Key Activities
If the success metrics are the points scored, then the key activities are the actions that culminate into points (positive yardage, first downs, and minimizing turnovers and penalties). To set key activity targets, calculate your conversion rates to see how many attempts you need to get a positive outcome. For example, if you need 10 pitches to land 1 media placement that brings in 1% more site traffic on average, and the success metric target is a 3% increase in target to the site, then you have to make a minimum of 30 pitches.
How to track progress against your targets
There are very few things these days that need to be tracked manually due to the perforation of APIs and webhooks. An API is a set of programming instructions that allow one software application to talk to another. A Webhook is an API that allows for real-time data transfer upon the occurrence of some event. When progress needs to be tracked in real time, the best solution is to find an app or software platform that has an open API or webhooks feature. That way, progress can be automatically sent to the tracking system without the need for manual input.
Zapier is one of the most popular, no-code tools for connecting different software platforms and automating workflows. It has a huge library of integrations and is very user-friendly. If you need more customization or power, then look into using Google Cloud Functions or AWS Lambda. These are serverless computing platforms that allow for the execution of code in response to events without the need to provision or manage a server.
Now that you understand how to set targets and track results on your employee scorecard, the next step is to weave in the point systems and the variable comp economics. This is honestly our favorite part of the variable compensation model process because it gamifies operations. In his book, The Great Game of Business, Jack Stack, writes, "To play the great game, you needed to know the rules, you needed to keep score, and you needed to share a stake in the outcome, good or bad." We now know the rules and how to keep score. In the next article, we will quantify how much outcomes are worth.