When we speak to HR groups we often ask how many organizations represented in the audience ´really´ paid for performance-the ´show of hands´ usually indicates that relatively few HR pros in attendance believed their organization did indeed pay for performance. Many have the intent to pay for performance they say-but the gap between knowing what to do and actually doing it is often huge. However every HR pro universally believes that paying for performance was a critical priority for the organization.

CEOs are struggling to get added mileage from major opportunity expenditures.  And what organizations spend on pay and rewards is often one of the major costs of running an organization-for profit or not-for-profit alike. In many instances it is the largest cost. So as an organizational leader or human resource professional it´s essential to manage pay and reward costs to add value to the goals of the organization. But paying for performance in real terms is not easy to make work-it´s easier to avoid addressing performance issues and basing pay on performance than it is to address them.

So it is a problem that needs some attention. We often ´riddle´ our organization´s policy and strategy statements with platitudes about the important role paying for performance to business success. However, even the most superficial critique of actual practice suggests that organizations are more likely to pay for something other than employee performance. How can we move to paying for performance in a positive fashion that makes the HR pro a ´hero´ and earns a seat at the strategy table of their organization?

"Give us an alternative to an ´all or nothing´ move to paying for performance". "How can we prove to our leadership team that this is worth doing?" Is there some way our company can "sneak up on pay for performance"? These common HR pro questions suggest that organizations may be interested in trying pay for performance before they risk a broad commitment to it. Many seem interested in providing ´evidence´ that it works.

What´s Paying for Performance?

What in fact are we talking about when we discuss paying for performance? Well, clearly just having the word ´merit pay´ in your compensation lexicon does not do it. Paying for performance literally means:

• Meeting preset goals or measures meaningfully influences pay and rewards and everyone knows and accepts this reality.
• More pay and other rewards in significant amounts go to the most skilled, best performers. The ´superkeepers´ get much more of what is available because they have fresh skills the organization needs and are able to translate it into measurable goal performance.
• The differences in skill application and performance that are defined in the performance management process should be matched by differences in pay and rewards that are awarded. The size of the award should basically fit the performance.
• Employees and managers understand why they receive the rewards they get. The management of pay and rewards should be a ´no surprises´ affair. The reward should match the message communicated about where the individual ´fits´ in the overall performance scheme of things.
• Managers must be responsible for determining, granting, and communicating the rewards. They must not say, "I would have done something different but HR wouldn´t let me". One of the entrance requirements to management must be the willingness to coach, provide feedback. And tell the truth about adding value.

We know these are difficult and challenging requirements for an organization to meet. The problem is that professing to pay for performance but not following through is a huge workforce trust issue for organizations and CEOs.  Organizations that really have a reputation of paying for performance have the best chance to attract and keep employees and manager who are willing to have their performance judged and rewarded and those who are willing and able to judge and reward performance. So the point is that more than lip service ´pay for performance´ is critical if rewarding performance is a true priority.

It is necessary to make the move to paying for performance a worthwhile business proposition. While doing at least one of the things described above is essential, doing as many of them as possible improves the probability of getting the most from dollars expended on pay and rewards. If you were going to describe the message an honest to goodness pay for performance organization communicates, it would tie all five elements of paying for performance into something like this:

Our organization pays for performance. We do this by creating understanding and responsibility throughout the workforce by translating or cascading the goals of the organization into goals, objectives, skill needs, and behaviors our employees can influence. These are part of our total reward strategy. We use variable pay to focus on goal performance because results can vary from year to year. Also, we use base pay to pay for the increasing value employees are expected to add over their careers. Base pay is determined as a result of employees acquiring and applying critical skill and competency to their work.

Managers who know the employees and their skill and goal performance best are accountable for managing this process. They allocate pay and reward budgets and manage performance. The performance management process does not focus on ´forms´ but rather on constant feedback, coaching, communications, and mentoring performed by the manager. Paying for performance in the total reward sense involves cascading goals, management accountability, paying for value added, and performance management as an integrating feedback, coaching, and communications element that links it all together.

How to Pilot "Low Risk" Pay for Performance

Organizations don´t need to go "whole hog" to see whether paying for performance is right for your organization. You can ´pilot´ paying for performance. A ´pilot´ is a trial run with the intent to gather information on whatever it is that is being tested, to learn more about the implications of the proposed changes, and make any changes before whatever is getting tested. Or, decide that the change being tested is not something the organization should do at all.

Why not implement pay for performance completely throughout the organization all at once? If your leadership is committed to make such a program work and understands that this change may create ´noise´ in the organization if the culture has been more of ´tenure and entitlement´ than performance, a total change is best. But rather than risk a failure, it is perhaps wise to do a ´trial run´ of pay for performance in order to see if it fits. The business case for paying for performance is obviously strong.

Many will commit to it in concept and theory but the real test is whether or not it will add value is when it is put in operation and needs support in addition to continuous communication, and championing. So until leaders can prove to the organization´s workforce that they are serious about actually paying for performance, it is best to take small steps, show business value, prove that paying for performance is better than not paying for performance, and then to move forward with confidence and assurance.

Actions to Emphasize Short Term

The quickest way to make improvements in the journey to paying for performance is by taking one or more of five actions that quicken your opportunity to determine whether paying for performance will work in your organization. While there are others that will help these elements of paying for performance are most often recognized as representing meaningful change. The five pilots to consider are:

• Cascading Goals: Test cascading goals to ensure the metrics used for paying for performance add value to the goals of the organization. Translate strategic and operational goals of the organization into measures and objectives employees in some segment of the organization can influence.
• Variable Pay: Do a trial run for variable pay. Variable pay does not fold into base pay and must be re-earned from performance period to performance period. Pick cascading goals and design a variable pay plan in some organizational unit.
• Performance Management: Modify your current performance management solution to emphasize the dialog between the manager and the employee: Coaching, feed-back, development, and continuous discussion about how things are going. Train a group of willing managers to provide feedback on performance, coach, and prepare development plans to emphasize key areas of performance improvement opportunity.
• Pay for Value-Added:  In a single organization or two implement a plan to pay employees as they obtain and apply the key skills that organization needs over time. Abandon paying for ´jobs´ and pay for value-identify the skills needed, training in skill acquisition, and measure employee ability to apply these skills to get needed results.
• Make Managers Accountable: In one or more organizations train managers to be accountable for managing the pay and reward process for employees in there area. They should be accountable for the budget they have and manage it throughout the year. Managers determine who gets what and explain it to the employees directly.

These ´pilots´ don´t need to be in different organizations of course. That´s because the goal is to ´implant´ all of these practices in every part of your organization. Make them ´contagious´ by demonstrating through pilots that there is a better way to manage the pay and reward process throughout your organization. Change ´the way it is done here´ to something better. Why is this important? Most organizations pay for other than performance or needed skills. They are more likely to pay for tenure, entitlement, or anything else than performance and skills.

Why Paying for Performance is Challenging

Why is it so hard to change pay and rewards? Because any major changes to pay and rewards impact employees quickly. Everyone is interested in changes to pay and rewards because they represent modifications to the status quo. There are a number of reasons organization hesitate to change pay and rewards:

• Organizations are commonly unwilling or unable to measure and communicate performance and skill differences. It is easier to ´pay everyone the same´ than to pay people for the value they add. Once bad pay and reward habits are formed, they are hard to change.
• Organizations have scarce funds for pay and rewards. These funds are often intended to serve multiple purposes that contaminate the goal of paying for performance or needed skills. And paying for other than performance by ´giving everyone at least something´ is probably the most debilitating practice.
• The pay and reward infrastructure of the organization isn´t geared to pay for skill acquisition and application or for performance against concrete goals. Instead the infrastructure is more geared to paying for how long employees are in jobs and defines work in terms of inflexible job descriptions rather than skill and performance.

Our suggestions are a slower way to implement pay for performance? Absolutely-organizations should focus totally on paying for critical skill and performance. But if major and complete change can´t be made, small changes should be undertaken. And that is what we are suggesting. Incremental change by demonstrating that all of the five pilots we are suggesting, cascading goals, variable pay, improved performance management, paying for value, and having managers responsible for pay management, provide a better alternative than does existing alternatives.

Use ´Facts´ to Support Paying for Performance 

Show this article to your CEO. Why should your CEO pay for performance-what proof do you have it really works?  A search of the literature suggests that the basis for justifying positive change can be summarized as follows:

1. Facts About Cascading Goals: Employees who understand what their goals are will be more likely to achieve these goals than are those who don´t. And if these goals are developed from having them cascade from the goals of the leadership team, goal performance will be more likely to add value to the business.
2. Facts About Variable Pay: Well-designed variable pay returns 4 times the cost in terms of outcomes. Even imperfect variable pay plans return twice what they cost the organization in terms of value to the business. Small teams where a part of team member pay is based on achieving team goals are more likely to achieve these goals than are teams where only individual pay is used.
3. Facts About Paying for Value Added: Organizations that really pay for performance are more likely to attract and retain employees who want to be paid for needed skill and successful performance than are organizations that do not pay for performance. Managers who indeed pay for performance will be most successful with employees who trust the manager to fairly reward their performance through pay.
4. Facts About Performance Management: No evidence suggests that merely changing the forms and paperwork used for performance appraisal changes the effectiveness of the process. However, where feedback, coaching, performance planning, and constant communications are the focus of the performance management process, employees are more likely to view the performance process as positive and helpful in improving their performance.
5. Facts About Management Accountability: Managers who are responsible for managing their pay and reward budgets are more likely to accurately communicate with their employees about the meaning in terms of skill and performance of rewards granted. Employees trust managers who tell the truth about pay more than managers who try to blame the amount of money they receive on others.

Of course this information, plus the experience of comparable organizations with these solutions, needs to be customized to the specific culture and business strategy of the organization. However, the case is strong and the need is great.

The Case for Performance Pay

If a powerful case makes paying for performance work in a ´pilot´ it does for moving forward in broader terms. A convincing case for paying for performance coupled with a test run on less than every element of the organization probably makes a directional change more acceptable to some organizations. Combining a solid logic for paying for performance with seeking a part of the organization that is led by a leader to champion the ´pilot´ who is not skeptical and perhaps has other experience with successful programs of a similar note, makes experimentation less problematic.

The ´punch line´ for piloting performance pay is provides the chance to showcase major directional change before implementing it more broadly. The risk, of course, is that even if successful the trial run will not be generalized more broadly. However, for organizations that hesitate starting the journey to pay based on performance more broadly, it is probably an alternative worth considering. The support for pay for performance is strong enough to permit the ´pilot´ to demonstrate the value of changing pay. In many organizations a move in that direction of any kind is a welcome change. It certainly is time to look at this now-it just could be a way for an HR pro to join the strategy table at your organization.