Pay for Performance: What It Is and Why It May Not Work

Pay for Performance: What it is and Why it May Not Work

Most businesses today say they pay for performance. It makes sense in most situations to provide the most pay to those employees who do the most for the business. According to the legal definition from US Legal .com, "Pay for performance ties an employee's pay to their performance on the job. Proponents of pay-for-performance programs believe they will attract and retain better employees and offer incentives to motivate and reward improved performance. They view uniform employee salary schedules as ineffective in attracting and retaining sufficient numbers of effective employees and as out of touch with compensation practices in other industries that tie salary to employee performance." ("Pay For Performance Law and Legal Definition") However, sometimes there exists a disconnect in the definition of performance at all levels of the organization. If the company does not have a shared definition of performance, employees will believe that there are inequities and a lack of practicing the philosophy. (Billkopf)

I have seen research that indicates that most people do not have a very good grasp of their own performance. So if an organization does not clearly define the performance that is expected, it is a good bet the employees will believe that they are not 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 is not 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. (Billikopf)

This also goes beyond personal views of performance. When a company claims to pay for performance, does that mean individual, team, division, or company performance, or a combination? 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 would not make much sense. When viewed in the broader view of company performance, it makes perfect sense. The company isn't performing, therefore pay is negatively impacted. (LaGace)

An actual or perceived decrease in an individual's pay is never a pleasant message to deliver, but it will make sense to employees if that is how an organization has always defined performance. They might find it hard to swallow though if the organization has never before defined performance and has never shared with the employees when times were good. That is why it is so important to develop a compensation package that will work under various business conditions. It is also necessary that we make sure that everyone in the business has a shared view of performance defined by the results that are expected. Clear and comprehensive communication has never been more important, and can go a long way toward helping employees navigate these difficult times. (LaGace)

For pay for performance to be effective, organizations need to meet several requirements. Although organizations have options to tailor their pay practices, successful pay for performance systems do have some features in common. A pay for performance system can only be effective if employees: value the pay or recognition that the organization offers in return for high performance; understand what is required of them; believe that they can achieve the desired level of performance; and believe that the organization will actually recognize and reward that performance. Those conditions are not likely to be achieved unless an organization meets certain requirements. These requirements include:

1. An organizational culture that supports pay for performance;

2. Effective supervisors;

3.