PLEASE VISIT OUR SPONSORS

Performance Management

Published May 2010

Pay to Perform vs. Pay to Fail

 

  Maksim Ovsyannikov

Pay for performance has been seen by many as a magic formula that will virtually guarantee the implementation of a successful compensation strategy for any organization. It makes sense. When employees perform according to specific, well-defined measures, the business grows profitably and employees are appropriately compensated. If employees don't perform, the company doesn't pay. Unfortunately, it's not that easy.

The U.S. Office of Personnel Management certainly thought it was. After decades of building pay scales based primarily on federal workers' seniority, the government became a major proponent of pay for performance. Its example encouraged many large companies to take the plunge. Unfortunately, few government success stories have emerged. More often, pay-for-performance programs have foundered, including the U.S. Defense Department's National Security Personnel System (NSPS) a pay-for-performance plan designed for 700,000 federal employees. In 2009, Congress repealed the program and plans to transition all NSPS employees to existing civilian personnel systems no later than Jan. 1, 2012.

The reason the pay-for-performance concept has been so disappointing is because the human aspect of motivating desired behaviors is not as cut and dried as the pay-for-performance approach generally implies. Most organizations simply don't know how to successfully define the performance they want, so organizations end up paying for failure rather than for performance.

At the Root

Traditional compensation management is a flawed process often executed without adequate supporting data. Talent leaders give managers budget guidelines and expect them to allocate salaries and bonuses based almost entirely on scores from annual reviews, then record compensation information in a spreadsheet.

Organizations that believe people truly move the needle for their businesses need a more innovative rewards program that integrates multiple measures of success into a sophisticated management tool. The right compensation program must be:

• Market competitive and capable of fairly rewarding all employees and providing strategically higher compensation to key performers.
• Transparent and able to offer the entire workforce visibility into how compensation decisions are made and what people can expect to be paid if they do well.
• Performance based and focused on real outcomes related to business performance, not simply a performance review score, and able to draw upon formal and informal measures that capture an employee's true contribution to organizational success.

It is critical that a pay-for-performance program incorporate these cornerstone elements, which work together to ensure success. For example, unless a company offers market-competitive salaries and bonuses, it can't afford to be transparent because the lack of competitiveness in the compensation structure likely would cause employees to leave over time. Further, transparency is required to communicate precisely what employees must accomplish to earn rewards.