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No-Nonsense Guide to Building Reward Systems

Even in these recessionary times, it is important to motivate and keep good employees. 

Steve Kerr served as Chief Learning Officer under Jack Welch at General Electric as well as Chief Learning Officer at Goldman Sachs

 In his new book, REWARD SYSTEMS Does Yours Measure Up? (Harvard Business Press, December 2008), Kerr presents a three-part program for building reward systems that allow employees to excel and create competitive advantage.

“If there are things that you’d like your people to do that you think can’t be rewarded, you’re wrong, because anything that can be measured can be rewarded,” writes Kerr. 

 “And if you’d like some things done that you think are impossible to measure, you’re wrong again,” he adds.  “You’ve probably neglected to operationally define what you want, because anything that can be described in actionable terms can be measured,” he adds.

With that in mind, Kerr lays out his program in REWARD SYSTEMS using examples from GE and Goldman Sachs as well as from academics, sports, health care, and politics. 

He says, “the basic principles behind a successful reward system are as well known as putting out the monthly payroll, and doing it well is actually less expensive than doing it poorly." 

"Yet these principles are usually violated (by you and your competitors). Therefore, there’s a huge competitive advantage to be had by doing it well,” he argues.

His three-part system consists of the following:

  • Define Performance In Actionable Terms – Defining performance, and making that definition operational, comes first. Therefore begin by converting the company’s values, mission statements, and strategies into tangible goals – including stretch goals – and then convert those goals into actions.
  • Devise Comprehensive Metrics – Next devise metrics to track these actions, understanding that anything that can be described in actionable terms can be measured.
  • Create Reward Systems That Work – Finally, create financial and non-financial reward systems that meet employees’ needs, reinforce company metrics, and align the company’s goals with employees’ work and responsibilities. 

Throughout the book, Kerr delivers advice for implementing the process effectively.  He describes, for example, “The Bulls-Eye Exercise” which can be used by teams anywhere in the organization to make mission, vision, and principles actionable. 

Kerr also explains how to decide exactly what needs to be measured; why “stretch goals” are essential for growth; how to use performance data for improvement versus promotion; how to recognize dysfunctional measurement systems; and why companies often reward the very behaviors that could drive them out of business. 

He also presents a discussion of the three types of rewards: 

  • Financial rewards – salaries, commissions, bonuses,
  • Prestige awards – access to executive clubs and dining rooms, office size and location, the right to fly first-class, etc.,
  • Job content rewards – responsibility, challenge, recognition, opportunities to grow professionally, and doing interesting and important work.

He points out that a drawback of financial rewards is their occasional unavailability.  This is also true of prestige rewards, which to be meaningful, must be somewhat scarce. 

On the other hand, one of the big advantages of content rewards is their availability.  Such things as challenge, recognition, and interesting work are not limited by budget or supply. In fact, one of the greatest content rewards is performance feedback. 

Yet it is often overlooked.  Kerr shows how to achieve the best mix of all three types of rewards – a mix tailored to each company’s needs.

He ends the book by restating his premise that the reward systems of most companies are inconsistent with their goals. 

“If that’s true of your company, then you have an excellent opportunity for improvement, and since it’s probably true of your competitors as well, you also have a great chance to gain competitive advantage,” he says. 

Kerr then reminds readers that the power of a reward is unrelated to its cost.  The key to improving the effectiveness of one’s reward system is not to add head count, hire consultants, or upgrade IT capabilities, but to define, measure, and reward performance in a manner that is consistent with the principles found in this book.


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