V o l u m e.. 8 , ..N o . ..2
April 2008

Making Pay for Performance Work

Two years ago I wrote an article about why pay for performance programs often fall short of expectations.  (http://www.jdwhite.net/HRMatters20.shtml).  In that article, I promised my faithful readers that I would write another article someday about how to make pay for performance programs work better.  Well, that day—finally—has arrived. 

There are many factors essential to the implementation of a successful pay for performance program.  Let’s talk about five of them.

Factor # 1:  Senior Management Commitment

When I work with organizations on pay for performance programs, I look closely at the rationale senior management has for the implementation of such a system.  What is the depth of the CEO’s interest?  Is the motivation based on an article that he or she read on an airplane last week?  Or is it something that the CEO has thought long and hard about?  Is the CEO realistic about the effort and investment that will be required?  Or does he or she view this process as simple and straightforward?

If the CEO has only a superficial understanding of what pay for performance really is and what is required to do it well, then the HR department has some work to do.  HR may need to have some initial discussions with the CEO to educate him or her on pay for performance systems, which can include the development of realistic expectations should such a program be implemented.

Factor # 2:  Company Culture

Pay for performance should be viewed less as a “program” than as a natural outgrowth of the company culture.  For such an initiative to be successful, the culture of the organization should be focused on helping employees succeed.  A pay for performance program should not be viewed primarily as a way to “penalize” poor performers.  Rather, it should be viewed as an approach to performance that seeks to clarify expectations, help employees develop, and fairly reward employees based on the quality of their contributions.

Factor # 3:  The Ability to Measure

This is perhaps the most challenging requirement for a successful pay for performance process.  Unless there are thoughtful and reliable performance measurements in place, the program can too easily degenerate into subjective judgments and unfair treatment. 

To avoid this, the organization must be able to describe what constitutes good performance in a clear and unambiguous fashion.  This description must be applied at the organizational, unit/ team, and individual levels.  Such measurements should include both financial and non-financial elements.  The process of identifying these measurements should not come solely from senior management.  It is much more effective to include employees in this process.  This not only provides different perspectives and useful information, but helps to establish buy-in for the new system.

Factor # 4:  The Skill of Your Line Managers

Line managers in some organizations resist pay for performance systems.  It calls upon them to assess staff members carefully and differentiate among them, a process that many managers are uncomfortable with.  It also requires that managers have the understanding and skills to explain the rationale for his or her decisions.  Finally, for a pay for performance program to work, managers must be skilled in the process of applying patient and constructive feedback and guidance to help their employees succeed.

It is safe to say that most organizations will need to make a significant investment in management training on these issues for a pay for performance program to work.

Factor 5:  Reward Differentiation

If you are going to implement a pay for performance program, then my advice is to go all the way—establish significant differentiation, both in salary and bonus, between outstanding performers and average performers.  Sometimes organizations lose their nerve on this issue and settle for very small differences.  Providing a 4% salary increase for an outstanding performer and a 3% salary increase for an average performer just isn’t going to get people excited.

As you can see from the above discussion, pay for performance is not for the faint of heart.  It takes a lot of time and hard work.  In my view, it is better not to do it all than to try to do it halfway.  Think closely about the above five factors.  If one or more of them are not in place, it may be time to step back.  HR’s role in such a situation may be one of education—helping to create the realistic foundation necessary to allow the organization, at some point, to move forward.

Til next time.

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