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Performance-Related Pay Models

Making Pay-for-Performance Models Work

The top level has announced that the organization is shifting to a performance-related pay model. What does pay for performance mean? Aren’t we all performing already? Aren’t we getting paid for that? The real answer is probably not.

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The vast majority of compensation plans are based on a starting market value for specific jobs after which future compensation is guided primarily by time in the job, staying within an overall corporate merit pool target percentage, and the fact that you haven’t screwed up badly during that time. Performance compensation plans take a vastly different approach by asserting that there is a clear difference between ordinary and extraordinary performance that merits a distinct difference in compensation.

Organizations are seeking and looking to pay-for-performance models to increase or strengthen the link between rewards and performance outcomes in a manner that makes good economic sense and rewards those who help the organization excel. Performance compensation plans can allow an organization to base pay on the achievement of certain improvements in corporate performance as well as overall employee effectiveness.

What’s Challenging About Pay-for-Performance Models?

Performance-related pay models have their supporters and detractors. The detractors state that more pay-for-performance models have been attempted and failed than have ever succeeded. Many, including Dan Pink, notable author and business consultant, go as far as to state that pay-for-performance models just don’t work. Dan states that performance compensation plans actually hurt performance for most tasks and that for tasks requiring creativity and unknown solutions (basically knowledge work), performance actually decreases with traditional carrot and stick management. Since this writing supports pay-for-performance as a viable solution, I’m going to throw you completely off for a minute by saying that I agree with Dan in part. I think that when performance related pay models become task-oriented they have the highest probability of failing.

How to Structure Performance-Based Pay So It Works

These models are most effective when the goals and performance measures are related to the overall enterprise goals and expected performance and to outcomes versus tasks. This is the part that is not easy for most organizations and the part where most failed pay-for-performance models completely missed the boat. This is the nexus – the place where human behavioral science and business meet. Making this work involves providing clearly articulated goals, a sense of purpose, and increased individual, group, and overall enterprise accountability.

Achieving complete organizational alignment – mission, goals, objectives, performance, and pay - is much easier to talk – or write – about it than to do. This type of alignment takes commitment because it means starting from the highest aspiration for your organization and working your way down to identifying and inspiring the smallest outcome and/or behavior that will get you there. Organizations must ask themselves, “What is it that we really, really, want to be? How do we get to be that? What will we need to do? Who will we need to do it? And, how will they do it?” It is that final question – “How will they do it?”- that becomes the basis for managing, measuring, and compensating your people for performance.

Helpful Guidance from the Expectancy Theory

Today’s pay-for-performance models are essentially a reiteration and application of Victor Vroom’s expectancy theory (1964) on motivation and management, in fewer words, of course. An understanding of expectancy theory is important as organizations begin to determine what it is that they are to tie compensation to. As stated earlier, I believe linking to tasks is a non-thinking, guaranteed-to-fail approach. Vroom states that individuals have different sets of goals and can be motivated if they believe that:
  • There is a positive correlation between efforts and performance.
  • Favorable performance will result in a desirable reward.
  • The reward will satisfy an important need.
  • The desire to satisfy the need is strong enough to make the effort worthwhile.

To get to the level of motivation Vroom describes requires an in-depth examination of each component and performance outcome needed to achieve the organization’s aspired level of performance. This is why an approach to pay-for-performance that focuses on outcomes is far superior to tasks.

Individuals have a need to feel trusted and valued for the outcomes they achieve that go beyond the tasks that comprise the achievement and that desire can be leveraged to improve performance exponentially. In this approach, a receptionist is valued not because he answers the phone but because he serves as a resource for information, provides an extraordinary level of customer service, and quite often as the first voice and impression of the organization serves as a determinant as to whether someone may or may not become a customer of that organization. Does it matter that in the past year, he fielded 40,000 calls, if the outcomes didn’t result in higher positive customer experience ratings? Of course, it matters! That is the simplest example of how making a successful link between pay and performance must incorporate measures that clearly distinguish between ordinary and extraordinary performance.

Regards,

Vivian L. Mora, SPHR
Mora&Associates HR Search and Consulting

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