The top 4 problems with pay for performance

Pay for performance or performance-related pay, as it’s also called, is a relatively simple concept. Under a performance-related pay philosophy, employees are offered financial incentive for meeting certain predetermined and quantifiable goals.

A PayScale report, “Strengthen the Link Between Pay and Performance,” claims that in 2012, 56 percent of companies used a pay-for-performance strategy. And that makes sense, because pay for performance makes sense, right?

Of course it does! Still, there are problems.

Here are the top 4.

  1. Not everyone is motivated by money. While the importance of pay can’t be overstated, it remains true that not everyone is motivated by pay. Some employees are motivated by praise, recognition, or the opportunity for better assignments. Employers will have to offer more than money to get the most from these folks.
  2. The annual raise ain’t what it used to be. According to the WorldatWork 2012-2013 Salary Budget Survey, salary increases for 2013 were projected to be 3%. The survey for 2013-2014 projected the 2014 rate as 3.1 percent. In other words, 3 percent is the new normal, and 3 percent doesn’t leave a lot of space for differentiation. However, differentiation is key. If employers can’t provide top performers appreciably more than mediocre and low performers, then what they do offer is unlikely to be very inspiring.
  3. Many managers are unskilled at giving meaningful evaluations. The abstract to that same PayScale report referenced earlier states, “Most organizations claim a pay for performance philosophy and strategy. But for many, there is a disconnection between words and actions.” Yup. What’s more, even managers who know how to write a good review—that is, one that clearly links the rating with a measurable objective—must be trained in competently communicating and advocating for your compensation philosophy, or your efforts at pay for performance will fall flat.
  4. The goals aren’t SMART?, and employees aren’t held to them anyway. SMART? goals are specific, measurable, attainable, realistic, and timely. Attempting to hold an employee accountable to a goal that isn’t SMART? isn’t fair and isn’t practical, either. On the other hand, a manager could develop the smartest goals around, but if they’re presented to the employee at the beginning of the review period and then never discussed again until the beginning of the next< review period—when much has changed in between—the process won’t be very effective.

All that said, the good news is that none of these problems (not even #2) are insurmountable. With patience, planning, and discipline, your organization can reap all the benefits traditionally attributed to a pay-for-performance strategy, such as increased efficiency and greater productivity.

Learn the ins and outs of creating a performance-based culture with this informative whitepaper: Strengthen the Link Between Pay and Performance