Pay For Performance

Are your pay practices consistent with your pay philosophy?

To answer this question most companies would say that, yes - they have a pay-for-performance (PFP) program.  Such a statement is chic, politically correct and offers a positive message about how the company values its employees. What’s to argue with? Paying employees on the basis of what they have contributed to the company makes sense, does it not? If they give more they receive more.

On the other hand, to answer that question in the negative is to suggest that you are not being fair to your employees, that your idea of a proper reward is to bypass individual performance in favor of treating everyone the same, regardless of contribution.  However, as that acknowledgement would paint you as an employer who is insensitive to variations of employee effort and achievement, it’s more likely that you’ll fall in line and say “yes, of course we pay our employees for their performance.”

There is an entrenched viewpoint by many in management that the granting of variable pay increases automatically means that their company provides pay for performance.  However, if as is usually the case, practically everyone receives some form of pay increase (90% +), is there really a meaningful distinction being made between high performers and those who merely occupied a chair for the past 12 months?  Isn’t such a practice (if we haven’t fired you, then you’ll get an increase) more like a modified attendance award?

If you're serious about it, your decision to adopt an effective pay-for-performance strategy should include two critical elements:

One of the common pay practices that continue to hamper the effectiveness of PFP plans for base salary increases is the misuse of the annual merit pay pool through inflated performance evaluations and automatic increases. Continued use of this practice will increase your fixed costs, but in a manner that will not effectively reward employee performance or encourage extra effort.

Making PFP actually work for your company will require hard decisions from line managers who are otherwise accustomed to maintaining employee morale through the avoidance of objective performance reviews.  We have seen that, while there is a shift toward greater rewarding of individual effort, additional monies are not being provided as a result of that shift.  Merit spend budgets will not increase to accommodate "feel good" increases. So in order to more effectively use available salary increase dollars companies need to reward their high performers with money effectively taken away from (not granted to) those performing at lower levels.  You can call this, "taking from Peter (average) to pay Paul (higher performer)."

This may also mean that many average performers, the bulwark of most companies, will receive less than they might otherwise have expected from past experience (which is at least an average raise).  What it comes down to is a company’s ability to afford proper rewards for their higher achieving employees (thus motivating and retaining them in the process) by reducing or eliminating rewards to those deemed as underperforming or going through the motions.

The risk exposure is that if managers, through the utilization of performance management programs, do not properly identify and restrict awards for less deserving employees, the PFP budget will not have enough funds to afford appropriate rewards for high performers.  So you should ask yourself, who is it you would rather disappoint?  Who has less impact on your business and whose loss would be less disruptive to your operations?

While published reports clearly indicate a trend away from one-size-fits-all reward systems, one should look below the surface to learn whether employee performance is being appropriately measured and rewarded.  That distinction is the true measure of PFP.

To effectively use a pay-for-performance system, a company should:

So the next time you are asked whether your company rewards employees for their performance, perhaps your answer might not differ, but now you recognize the distinction being made by your employees. It's up to you whether to be satisfied with your answer.