Pay For Performance, Really?

Most companies today claim to pay for performance.  It makes sense, who wouldn’t want to spend their money on an area that provides the highest return?  But are you paying enough to make it worth your employee’s extra effort?  Even more importantly, do your employees believe that they will receive higher pay if they outperform their peers?
 
Why does pay for performance matter?  I used to work in a unionized public sector environment where pay was determined solely by job level and years of experience.  I was giving a review to a solid performer one time who actually said to me, “I don’t have any reason to work any harder, that guy who’s worked here longer than I have makes more money than I do even though he doesn’t do as good a job.”  Now, I would never recommend saying that to one’s supervisor as it certainly colored my opinion of her; but I did have to acknowledge (internally) that she wasn’t totally off base.  The pay system that we were bound by didn’t reward performance at all and I couldn’t give anything other than the prescribed increase.  This was a fairly young girl who made this comment, but I’d bet that employees probably share these feelings to some degree in any environment where performance doesn’t have a direct tie to pay.  Not good if you need your employee’s full efforts to succeed.

There is another business reason to pay for performance that may just get your CFO on board.  According to Hay Group surveys of “most admired” companies, more than half of those identified companies provide pay increases to their top performers that are over two times larger than those provided to their average performers.  They truly differentiate the rewards given and really pay for performance.  Since companies that receive the most admired rating consistently outperform their competitors financially, emulating their best pay principles is probably not a bad idea.

It’s easy to test and see if you really do pay for performance by comparing the total remuneration package of your top performers to that of your average performers.  If an appreciable difference doesn’t exist, you might want to reconsider how you give your rewards out.  You may even be able to reallocate funds from lower performers to fund the rewards for your top performers.  If you do differentiate pay for top performers then you should communicate that to all of your employees to encourage more effort and better results from all employees who will believe they’ll be rewarded for those efforts.

Darcy Dees, CCP works as the Compensation Manager for Rock Bottom Restaurants, Inc., headquartered in Louisville, CO.  She has worked with RBR for nearly 10 years helping to develop many of the compensation and performance management programs the company uses today.  She spends what little free time she has hiking and reading.
The opinions expressed here are the personal opinions of Darcy Dees. Content published here is not monitored or approved by Rock Bottom Restaurants, Inc. before it is posted and does not necessarily represent the views and opinions of Rock Bottom Restaurants, Inc.

Image:  Creative Commons Photo "Don't Hide.  Be Different!" by pasatraspaso

Comments

[Joe Brown]

One of the most concise arguments for pay for performance that I've ever heard (and I've been preaching it for 20 years). The test you suggest is brilliant in its simplicity.

[Darcy Dees]

Joe - thanks for reading and for the supportive comment!

[Paul Weatherhead]

Darcy,

Thank you for the reminder that pay-for-performance doesn't end when the checks are cut. There needs to be a look-back to see if the system is working as intended.

Merry Christmas to you and yours!

[Warren Heaps]

Darcy -

Your comments are spot on. However, you have presumed that the measure of performance is well-managed, consistent and institutionalized in the organization. We all have heard of and/or experienced performance management systems which are ineffective and despised by staff and managers alike.

Our experience shows that identification of strong performers is really a simple exercise that does not require complex systems and voluminous forms. It comes down to answering just three questions:

1) Do you have good ideas?
2) Do you listen and adapt to others (e.g., colleagues, clients, customers)?
3) Can I count on you to deliver?

If you answer YES to these three questions, then you are probably amongst the best performers in your company.

Imagine, for a moment, meaningful pay differentiation supported by a simple and clear measure of performance that your entire organization would easily understand and support. Sounds, good, doesn't it?

Warren
http://internationalhr.wordpress.com