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Paying for Performance: Easier Said Than Done

Paying for performance means just that: rewarding individuals based only on their performance on the job. Since the performance of individuals can vary greatly, a pay for performance approach usually results in rewards that range from very low to very high, depending on each employee’s contributions.

Many organizations claim to have a “pay for performance” compensation system. However, when you look closely, you often find something that does not resemble pay for performance at all. Why is that? Because there are a number of factors that conspire to make a true pay for performance approach difficult to achieve.

Economic pressures

Salary increase budgets have, for a number of reasons, been hovering in the 3-4% range for a long time. The lower the average increase, the less room there is for making significant differentiation among performers.

Psychological resistance

Many managers feel safer giving all their employees the same or similar salary increases. This saves them from explaining why they gave more to one person than another. Part of the discomfort here is that few organizations use objective performance measures. In the absence of these, ratings can become very subjective and more difficult to defend.

Time constraints

Creating a true pay for performance program can’t be done overnight. It takes a lot less time to just give everyone their 3% increase and move on.

What’s right for your organization?

If pay for performance is not being practiced in your organization, this may not necessarily be a bad thing. Your culture may support a less competitive environment. In such a climate, an organization may not wish to make significant differentiation in the rewards it provides to employees. It may believe that such an approach would hurt the “team environment.”

One danger, of course, is that your best performers may come to believe that their performance is not being rewarded fairly, and they may decide to go elsewhere. Another danger is that a culture of “mediocrity” may prevail, where employees see no particular reason to make a special effort to improve their performance. Over time, this could have an adverse impact on overall organizational performance.

The one thing an organization should NOT do is claim to be a pay for performance organization and then not have its rewards program reflect that. If pay for performance is not for you, that’s fine. Tell your employees that.

However, if it is for you but it is not currently being practiced, then you have a different challenge on your hands: how to start taking the steps necessary to make it come alive in your organization. Is this difficult to do? Yes. Can it be done successfully? Absolutely. In a future issue of HR Matters, we will explore some ways to go about doing just that.

Til next time.

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