Remember the saying “I owe, I owe, so off to work I go?” Although compensation is the reason people work, why they choose to work at a particular place involves other factors such as the availability of training, the supportiveness of the workplace and workplace culture.

What role does pay for performance play in attracting and motivating workers? According to a 2007 Forrester Wave™ report, “performance and compensation is the linchpin of strategic HR.”

It is hard to argue that a performance management process that includes goals linked to organizational outcomes, training initiatives and individual rewards will not improve employee focus. Yet, those who argue against pay for performance propose that challenging work; the opportunity to learn and grow and the presence of a supportive work environment are more effective when it comes to improving employee performance. For example, psychologist Frederich Herzberg writes “when you do offer fat paychecks and other extrinsic incentives, people won’t necessarily work harder or smarter.” He claims that this occurs because the majority of people are “motivated by intrinsic rewards.”

Of course, a main caution is that the performance management process must be functioning well before pay for performance can be implemented. A poorly functioning performance management system can breed mistrust, employee frustration and may result in employees diverting effort to the wrong tasks.

Most likely the best solution includes a great working environment with a pay for performance element. In the report What Are Key Pay Issues Right Now? Zingheim and Schuster – experts in compensation – suggest that organizations can avoid a culture of entitlement by building a “"best high-performance place to work," where employees add sustained value over time, generate positive business results and are rewarded accordingly.” The report backs up this belief with proof that linking pay to performance pays off.

How do we proceed with a pay for performance program? Reading the Zingheim and Schuster document is a good place to start. Communicating with other organizations that have implemented these programs is another effective way to begin to identify the strategy that will work best in your environment.

Perhaps compensation can even be linked to performance in innovative ways. Bill Taylor highlights an innovative strategy used at Zappos, the shoe company. As Taylor explains In Harvard Business Review Online, new hires complete a four-week training program, after which they are offered a $1,000 bonus to quit. Individuals who do not accept the $1,000 demonstrate that they are committed to the job, a quality that Zappos is looking for in its employees.

References:

Herzberg, Frederick. “One More Time: How Do You Motivate Employees?” Harvard Business Review Online, 2008.

Taylor, Bill. “Why Zappos Pays Employees to Quit –And You Should Too.” Harvard Business Review Online, May 19, 2008.

Thomas, Zach. “The Forrester Wave™: Integrated Performance and Compensation Solutions, Q3, August 17, 2007.

Zingheim, Patricia K. and Jay R. Schuster. “What Are Key Pay Issues Right Now?” Schuster-Zingheim and Associates, Inc., 2007.