Is There Any Hope for Pay for Performance?

Pay for performance seems to be much in the news and HR trade publications lately. The general take-away from all of the articles is that pay for performance doesn’t work (or at least doesn’t work as well as anticipated or desired) but everyone does it anyway (to some degree) because everyone else is doing it.

A May article from Talent Management magazine tells us:

“The reason the pay-for-performance concept has been so disappointing is because the human aspect of motivating desired behaviors is not as cut and dried as the pay-for-performance approach generally implies. Most organizations simply don't know how to successfully define the performance they want, so organizations end up paying for failure rather than for performance.”

Paying for failure rather than performance – that’s what happens when you fail to clearly define, in an achievable and measurable (not subjective) way, what it is you expect people to accomplish. A June article (“Channeling Malcolm Gladwell on Pay Systems,” requires subscription log-in) from Workspan magazine cited the research on this:

“In the 2005 Annual Review of Psychology, two organizational psychologists said the following regarding the effectiveness of merit plans – which does little to increase one’s confidence level for using them: ‘Although merit pay continues to be the most widely used pay-for-performance program (especially among salaried employees), there is surprisingly little evidence about the performance implications of adopting, or not adopting merit pay programs.’

“In addition, three practitioner surveys show that performance management and pay-for-performance plans have considerable room for improvement.

“Two major surveys show that, in general, financial incentives are outranked by organizational, career and job-related factors for improving employee engagement and motivational levels. The 2007-2008 Towers Perrin Global Workforce Study found no financial incentives among the top 10 drivers of employee engagement. A 2009 McKinsey & Co. report found that three noncash motivators, including visibility with top management, are more effective motivators than the three highest-rated financial incentives, including increased base pay and cash bonuses.”

And yet… This month’s issue of Workspan includes an excellent case study (“Performance Management Rewired for the Recovery,” requires subscription log-in) of just how Intuit has made pay for performance work. Some Intuit methods that are far different from traditional (and often failed) pay for performance management approaches:

• Replacing “meets/exceeds” language in performance ratings with “delivering the business impact it needs”
• Using everything to reward performance – evaluation, compensation, recognition and opportunity
• Ensuring top performers are signaled, through various mechanisms, of their star ability

My point? Pay-for-performance has a role to play in the HR toolbox. But it’s not the only tool as it seems to have become in many organizations. It is but one of many methods.