Project Management Institute

Cash on delivery

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by Sarah Fister Gale

illustration by Rich Lillash

you'll only be fully paid if you're successful. That's a scary prospect in a world where projects seem to fail as often as they succeed. Yet this concept currently is gaining credence in multinational companies seeking leaders who don't balk at a little risk.

Asking project managers to risk part of their salary in exchange for extra bonuses for success can be an enticing way to motivate them and tie profits to performance. For example, in a typical risk-based pay model, 20 percent of the project managers' total salary is put at risk, but there's a 20 percent additional pay incentive available if they meet established goals. If project managers normally earn a $100,000 base salary, they instead would make $80,000 guaranteed, with an additional $40,000 paid to them based on a set of objectives. So while it's possible that the project managers may in crease their salary by $20,000, they also may lose that much.

executive summary

img Asking project managers to risk part of their salary in exchange for extra bonuses is an intriguing way to build ownership into project success, but it will only work for certain types of employees and companies.

img Entrepreneurial workplace cultures that embrace risk taking behavior will find the most success with this kind of pay structure, if it's designed correctly.

img The project managers must be involved in establishing the measures that determine compensation, and they must have control over the outcome.

img The program should avoid the “all or nothing” approach in favor of a sliding scale.

Unlike skills- and knowledge-based pay systems, a risk-based structure only rewards staff if the project is successful, not just because a project manager completes a series of training courses, says Marilyn Sykes, an independent consultant in Ottawa, Ontario, Canada. It also ties the employees' financial prospects to the company's success, giving them ownership in the organziation's future.

Why it Works

img That kind of risk can create undo stress and negativity, but in the right environment and under the right circumstances, it can be an attractive motivator for certain styles of workers, says Tom Mochal, president of Ten Step Inc., a business methodology development consultancy based in Atlanta, Ga., USA. “Risk-taking is a good trait for project managers,” he says. “It shows they are flexible, creative and not working in a box.”

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When offering project management services, you are asking the executive team to trust your ability to improve the chance for business success.

Sebastian Cazacu, PMP, Managing Partner, Sinergent Consulting, Bucharest, Romania

img Some companies are more apt to succeed with risk-based pay than others, he says. “These models work well in companies with entrepreneurial cultures, where a chance at a 20 percent bonus may go over a lot better than a guaranteed three percent.” In those environments, people are more accustomed or willing to put something at risk, whether it's salary, stock options or job security, in hopes of greater gains.

A company trying to alter its workplace culture to make it a more self-motivated risk-taking environment, may help attract that style of employee with this kind of pay structure, Mr. Mochal says.

But it won't work for everyone. New employees who have not worked under previously higher-base salary conditions are more likely to embrace the system, whereas it may draw concerns from long-standing employees used to greater financial security. That can work for or against a company, depending on its goals, Mr. Mochal says. The people who will embrace the idea of at-risk pay have confidence in their abilities to succeed and already are hard workers, but those without good track records are more likely to leave. “If a company wants to encourage risk-taking behavior in certain categories of employees, this can be a good way to achieve it.”

Global markets where project management is a newer concept also may be more likely to embrace such an incentive program, says Sebastian Cazacu, PMP, managing partner of Sinergent Consulting, a TenStep affiliate in Bucharest, Romania. “In the Romanian business environment, project management is in its inception phase,” he says. “When offering project management services, you are asking the executive team to trust your ability to improve the chance for business success. It is a matter of selling the promise of project performance in exchange for the certainty of a compensation package.”

For Mr. Cazacu, risk-based pay is a legitimate request for project managers. “We are always talking about project managers' responsibility to deliver on time and within budget. Without a financial responsibility, there is a risk of discrediting this statement,” he says. “How can we convince executive managers that we are providing business value if we are not willing to bet on our own performance promise?”

But even Mr. Cazacu acknowledges that such incentive programs have traps if the project manager doesn't have the influence to drive the business results of the project or the outcomes are not directly dependent on their professional abilities and willingness to perform.

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For every risk or measure, you have to be sure the project manager is responsible for the details associated with those metrics. Otherwise you hamstring that person.

Stéphane Parent, PMP, Senior Information Specialist, EDS–Canada East Solution Centre, Charlottetown, Prince Edward Island, Canada

Control Issues

It takes time, research and negotiation to avoid those traps, says Michael Beer, professor emeritus of business administration at the Harvard Business School, Boston, Mass., USA. “A lot of managers want to assign new pay programs because they don't want to look at other factors that are causing problems.”

A program must measure the right objectives and offer project managers enough control over the outcomes so that they can drive their own success. If you put someone's salary at risk, you have to give them the authority to manage that risk, which means delegating critical decisions and giving project managers the resources and leadership opportunities they need to make the work happen. “The project manager has to control what the incentives are tied to,” Prof. Beer says. “Otherwise the program will demotivate.”

img In fact, control is the most important determiner of the success of a risk-based pay program, according to experts across the board. “I think it can work as long as you measure the right things,” says Stéphane Parent, PMP, senior information specialist, EDS–Canada East Solution Centre in Charlotte-town, Prince Edward Island, Canada. He would agree to such a program only if he was confident that he had control over the outcome. “For every risk or measure, you have to be sure the project manager is responsible for the details associated with those metrics,” he says. “Otherwise you hamstring that person.”

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To set up a successful program that project managers will feel comfortable with, start with performance expectations, not the money. “Ask your project managers what they see as the barriers to project success, and fix those first,” Prof. Beer says. “That one question will expose a lot of data that can help a company solve hidden problems.”

Defining Success

Common complaints include the senior team not allocating enough resources for certain projects and project managers working with staff over whom they have no authority. “They will often identify two or three issues that are critical to the project that they can't control,” Mr. Beer says.

Once those issues are addressed, senior management, the human resources team and project managers jointly can identify which measures would be an accurate yardstick of performance and decide how those will determine the additional pay structure. This part of the process requires serious discussion of what actually constitutes “success,” Ms. Sykes says, and project managers must be involved. “The project managers know better than anyone what skills are necessary to successfully complete a job.”

It's easy to select “on time” and “on budget” as the sole measurements, but doing so can cause unintended consequences, says Glen Ford, PMP, an independent contractor for Can Da Software, Mississauga, Ontario, Canada. “If the incentive does not directly encourage the behavior, the incentive will not work.” The risk, he says, is that project managers become overly focused on the measurement instead of the overall project, causing them to cut corners, overwork team members or pad estimates to ensure their own success.

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5 Musts for Risk-Based Pay

1 Be sure your workplace culture supports a risk-based style pay program. These programs work best in smaller entrepreneurial companies where everyone is willing to risk something up front for later reward. This is not an ideal program for larger or more established companies where employees derive employee satisfaction from stability and safety.

2 Involve project managers in the planning and definition of the measurements that impact their financial success. Without their input, such a pay plan can backfire tremendously, causing frustration, anger and an increase in turnover.

3 Only measure project managers on things they can control, and give them the authority and resources to be successful. The at-risk portion must be obtainable entirely through the employees' efforts or it won't work.

4 Don't assume this or any incentive program will be your magic bullet. systems move people—they don't motivate them—and money alone will not fix inherent problems in your project management process.

5 Call it something else. “Risk-based” and “at-risk” are frightening terms, especially in the aftermath of so much downsizing and job loss. “Pay for performance,” “salary incentive” or other more positive sounding titles likely will have greater appeal.

To avoid such behavior, you must set realistic goals with three to five flexible measures that can be achieved with concrete guidelines for measuring them. Along with on-time and on-budget expectations, you may want to factor in client satisfaction, team morale and total quality of the project, Mr. Parent says. Team morale is especially important and an issue he fears gets overlooked. “You can't just measure costs, you have to balance the risks,” he says. “If you cancel water and coffee service, overwork employees and eliminate perks, you may hit your goals but your team will want to kill you before the project is over.”

He also believes project managers have to be free to do their own assessment of the project up front to decide whether the risks are worth the reward and to validate they feel comfortable with the measurements established. That includes giving them an opportunity to sign off on the cost and schedule targets.

Sliding Scales

img Last, you need to establish levels of success, says Craig Clive, principal of Baylights Compensation Consulting, Ellicott City, Md., USA. “An all-or-nothing approach is dangerous.” If project managers only receive compensation for meeting 100 percent of the goal, they may stop working if the team falls behind or goes slightly over budget. Instead, he suggests applying a sliding scale to success, offering the total bonus for meeting all of the goals and percentages based on how close the team comes, with a minimum expectation of 75 to 80 percent for any incentive to be paid.

Similarly, different goals should be worth more money, according to Mr. Clive. Depending on what you perceive to be the most important element of project success— time, cost, quality—give that measure more value. However, don't go overboard. If there are too many measures or some of the measures have too little value, the team can lose focus quickly, dropping the elements that bring small insignificant rewards. Limit the measures to five or fewer, and don't give any one measure more than 30 percent of the weight of the total incentive, Mr. Clive says. That will compel the project manager to focus on achieving all of the measures but place the most effort on achieving those which brings the greatest reward.

Above all, be flexible. A successful risk-based pay program redefines measurements when the situation calls for it. If resources shrink, clients change their minds or deadlines are moved, you have to be willing to adjust the incentive program accordingly. Otherwise, you cripple the very people you are relying on to drive your success, and that's a disincentive for everyone. PM

Sarah Fister Gale, a Minneapolis, Minn., USA-based freelance writer, has written for Workforce Magazine, Training Magazine, Cleanrooms and Food Safety.

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI.

PM NETWORK | OCTOBER 2004 | WWW.PMI.ORG
OCTOBER 2004 | PM NETWORK

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