Pay For Individual Performance: Pre-requisites For Success

~ Robert J. Greene, PhD

Pay for performance is a concept that should be embraced by every organization. Research tells us that what you measure and reward you will get more of. But that puts the pressure on those who define performance must be sure it leads to the end result they desire. The banking industry severely damaged the economy with ill-conceived incentives… employees were richly rewarded for nearly destroying their own organizations and the investors who trusted them. Defining performance solely as maximizing physical output can result in shoddy quality. And attempting to use pay for performance to maximize individual motivation may result in employee discontent if their cultural orientation prefers group rewards.

Performance at the individual level can be defined in many ways. Productivity, sales, met objectives, quality and cost control are all measures that can be used to measure and reward performance. And there are some measures that are ill-conceived. The majority of public sector entities had historically used time-based step progression to administer base pay. But that rewarded longevity without ensuring the individual warranted a pay increase. Time-based systems and general increases will tend to drive high performers to other organizations, since they can do better where contribution is measured and rewarded. Paying for time spent sends the message that what is contributed does not matter. As a result many public sector entities have replaced time-based progression with merit pay.

There are pre-requisites for success using pay for performance. Readiness to implement pay for performance should be tested prior to implementation. The following assessment questions should be asked and honestly answered.

Assessment Of Readiness For Pay For Individual Performance

Base Pay

  1. Are jobs documented accurately and does the documentation reflect current duties, responsibilities and qualifications?
  2. Are jobs placed into a grade/classification structure in a manner that reflects internal equity?
  3. Are pay ranges assigned to grades that are competitive with prevailing rates in the relevant labor market(s), and do they reflect the organization’s desired posture relative to the market?
  4. Are performance standards established for jobs (in the form of criteria for assessing performance in the job and/or goals for the current period)? Are the standards reasonable?
  5. Is there a defined performance management policy that defines management’s responsibility to establish expectations at the start of the year, continuously measure performance during the year and appraise performance at the end of the year?
  6. Have managers been adequately trained in performance management?
  7. Have employees been informed of the role of their managers and themselves relative to performance management and do they understand how the process works?
  8. Are there policies mandating that performance appraisals be conducted for all employees annually according to an established schedule?
  9. Are there adequate corrective actions if appraisals are not done on schedule, if they are superficial or if the manager and the employee disagree on the rating?
  10. Is there an understood and agreed to model for linking pay to performance?

Variable Pay

  1. Is there a clear consensus on what constitutes organizational performance?
  2. Are there measurements in place for determining organization performance (including both criteria and standards)?
  3. Has organizational performance been cascaded down through levels?
  4. Are there measures in place for determining unit performance?
  5. Are performance criteria, standards and measures been defined for units?
  6. Have unit performance criteria, standards and measures been aligned with each other, to prevent conflicting objectives?
  7. Has a clear philosophy been agreed on relative to who should be considered for participation in variable pay plans?
  8. Is the organization able to commit to expenditures for variable compensation above and beyond base pay and benefits? Are there circumstances that could render financial commitments unaffordable?
  9. Has executive management committed to do the necessary communication/ training to provide employees with enough information about variable pay plans to determine whether they believe them to be equitable, competitive and appropriate?
  10. Have there been past experiences with variable pay that might make it difficult to gain the trust of employees?

Conclusion

Pay for performance can work. But only if pay is appropriately tied to performance. And implementation and administration should occur only after an organization ensures its readiness. Differentiating between employees can have undesirable results if the context is not right. Culturally diverse workforces are a reality for most organizations and that diversity can result in mixed reactions when rewards are based on performance. Whether cultural differences should be considered is a decision that should be made carefully. Doing the same thing for everyone can be administratively convenient but be viewed by everyone as wrong… there will just be different reasons for different people.