Laleh Hassibi, PayScale
Today most organizations are either moving toward a pay-for-performance compensation strategy, or at least discussing it. Correlating pay with performance has proven to improve employee retention in many companies, but even so, some detractors of performance-related pay models will tell you that more have been attempted and failed than succeeded.
So, what's the answer?
Here’s the thing about pay-for-performance — it’s not easy to get it going in an existing organization. Establishing an effective pay-for-performance program takes time, careful planning and serious hard work to implement. If your organization is not prepared to surmount the potential obstacles to implementation, maybe pay-for-performance isn't the right answer for you.
To help you decide whether or not you can make pay-for-performance work, it might help to know and prepare for the 3 barriers to pay-for-performance success.
- Lack of executive support
Executive leaders often see pay-for-performance system (or any HR program) as a way of limiting their authority or range of options. Even if you have buy-in from the beginning, it’s important to continually reinforce the importance of pay-for-performance to your executives.
- Lack of manager training
Your managers are the ones who will need to back up your strategy and communicate it to your employees. Therefore, they need to be trained on how to have tough conversations around pay when employees don’t qualify for a pay raise based on their performance, and they need to be able to justify those decisions. If your managers are simply telling people “Sorry, they won't let me give you a raise,” that doesn’t serve the overall strategy. Your company’s managers need to be able to tell employees why they are not getting a raise, and what they can do about it to improve their performance in the future.
- Perceived budget restrictions
There is a common misconception that rewarding performance will cost the company more money. That could be true – if you do it wrong. However, if you make a commitment to only putting your compensation dollars where the work is, and not rewarding under-performing employees, it generally works out to save money.
Another important factor to consider into the equation is the cost of turnover. If you don’t pay your top performers what they are worth, your competitors will. The cost to replace an employee, in terms of recruiting, lost work, missed deadlines, etc. most certainly will outweigh the cost of rewarding them appropriately to start.
For more information about implementing a pay-for-performance model in your organization, including a checklist to help you get executive buy-in, take a look at PayScale's complete guide on the subject.