Pay-for-Performance

DESIRABILITY OF PAY-FOR-PERFORMANCE

Today, performance management programs are used for a wide range of decisions regarding:

• Compensation (base pay and short- and long-term incentive plans)
• Employee performance
• Training and development
• Succession planning
• Promotional decisions
• Organization goals and objectives
• Employee engagement

The idea of relating pay directly to performance is attractive to most organizations – so much so that most companies apply pay for performance to determine merit increases.

Management and employees agree that tying pay to performance is desirable, but today performance-based compensation has spread beyond traditional base pay increases. It can influence both short- and long-term incentive pay as well. Pay-for-Performance has even been extended to nontraditional groups such as teachers where factors other than performance have typically determined pay. Today, pay-for-performance is going through its own transformation. Adding to this transformation, a greater shift to remote work has created new challenges in performance management for many businesses.

Companies are now adopting programs that:

• Are simpler than former complicated programs
• Ensure regular, ongoing performance feedback between employee and manager rather than the once-a-year performance review
• Eliminate forced (aka stacked) ranking practices of the past
• Discourage labeling of employees
• Encourage ongoing employee development

Drawbacks

Despite its obvious appeal, not all aspects of pay-for-performance are desirable.

Inequity. A focus on performance often conflicts with the compensation goal of equity: in a pay-for-performance system, employees in the same work group doing the same work may have different pay rates that recognize difference performance contributions.

Employees can resent this, especially if the program is not well designed and communicated, or if employees do not perceive performance as a proper criterion by which to set pay.

Competition. A pay-for-performance program implicitly or explicitly puts people in competition with each other. Forced ranking and labeling of a high-performing team for performance-based rewards can cause fracturing of a team or workforce. Yet cooperation is what is really needed for the work of the organizational unit to be accomplished.

Effort. Pay-for-Performance requires managerial time and effort and must be designed and administered carefully. Failure to put forth the training, communication, and effort required can lead to a program that does not actually tie pay to performance.

Distrust. Pay-for-Performance most often relies on the judgment of managers about the level of performance of employees. Unless employees trust the judgment of the managers and perceive that it is in fact employee performance that is being rewarded, there is a possibility that employees will distrust the plan. The problem is that trust cannot be entirely created by the compensation program. Although a good program can enhance the feeling of trust, trust between employees and management must already be present.

Overly Complicated Companies have been looking to simplify the performance management process. A complicated plan is challenging to administer and not well received by managers and employees alike.