What is the Definition of Pay for Performance?

Most businesses today say they pay for performance.  It only makes sense in most situations to provide the most pay to those employees who do the most for the business.  However, sometimes there exists a disconnect in the definition of performance at all levels of the organization.  If the company doesn’t have a shared definition of performance, employees will believe that there are inequities and a lack of practicing the philosophy.

We’ve all seen research (here's some with great charts) that indicates that most people don’t have a very good grasp of their own performance.  So if we don’t clearly define the performance we expect, it’s a good bet our employees will believe they aren’t being paid adequately for their performance.  Another disagreement can come when employees believe that their effort rather than their results, equates to performance.  You can have an employee who isn’t terribly efficient who always puts in extra hours so believes that they are your top performer; failing to understand that their neighbor actually generates more output in less time.

This also goes beyond personal conceptions of performance.  When a company claims to pay for performance, does that mean individual, team, division, or company performance, or a combination thereof?  In our current economic environment, many companies have had to freeze or in some cases cut pay.  If we were only paying for individual performance that wouldn’t make much sense.  When viewed in the broader context of company performance, it makes perfect sense.  The company isn’t performing, therefore pay is negatively impacted.

An actual or perceived decrease in an individual’s pay isn’t ever a pleasant message to deliver, but it will make sense to our employees if that is how we’ve always defined performance.  They might find it hard to swallow though if we never before defined performance as organization-wide and never shared with our employees when times were good.  That is why it’s so important to develop a compensation philosophy that will work under various business conditions.  It’s also imperative that we make sure that everyone in the business has a shared concept of performance defined by the results we expect.  Clear and comprehensive communication has never been more important, and can go a long way toward helping employees navigate these difficult times.

Darcy Dees works as the Compensation Manager for Rock Bottom Restaurants, Inc., headquartered in Louisville, CO.  She has been working in Compensation for over 5 years now and recently attained her Certified Compensation Professional (CCP) designation.  She spends what little free time she has hiking and reading.

Image: Creative Commons photo "Handshake" by Andyrob

Comments

[Paul Weatherhead]

Thanks, Darcy, for helping me organize my thoughts on this same issue.

For a while there about a month ago I was exhausting myself mentally on the WorldatWork Online Community trying to provide compelling proof that pay-for-performance works. Despite the excellent evidence provided from the research of Schuster & Zingheim, Milkovich & Newman, Ann Bares, and others, there was a cadre of anonymous posters that refused to be budged on their thoughts that it was time for incentives to go.

It was about that time I started playing with a radical idea in my head. Isn’t any kind of remuneration that an employer provides a form of pay-for-performance? When an employer provides a base salary, wage rate, and a benefits package, isn’t it with the expectation that the employee will come back the next day and continue doing what the employer asks them to do?

And since there are so many people in our country looking for employment these days - and so many people from around the world still crossing our borders to come to the land of opportunity - isn’t this proof positive that by its very nature all remuneration is pay-for-performance?

And I like your take that it is the responsibility of the person/organization that is providing that compensation to make crystal clear what performance is expected.

[working girl]

I liked your point about working long hours v. delivering value. 'Performance' is such a vague word, it's no wonder someone working a 60 hour week thinks they're performing, independent of actual results.

[Darcy Dees]

Paul & Working Girl -

Thanks for reading and commenting. It strikes me that frequently when businesses say their pay-for-performance programs aren't effective, you'd get a different answer from everyone if you asked them what performance they are measured on. And performance does not equal effort, it equals results.