Taking Performance Management to the Next Level: Pay for Performance

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You can’t drive your organization to success without the help of employees at every level of the org chart.  Therefore, many public and private organizations use performance management programs to help employees reach their full potential.  Last month we talked about how these strategies can offer organizations key ways to ensure that organizational goals are met.  This month we talk about taking your performance management system to the next level – a move that many organizations, particularly in the public sector, are reluctant to make:  linking pay to performance.  Find out not only how you can implement pay for performance successfully but also why it’s critical that you do.

The crucial question that any organization implementing an effective performance management system faces is how to incentivize employees. Loyola Notre Dame Library, located in Baltimore, Maryland, needed a way for employees to see their link to the library’s overall goals. They also desired a method to recognize good work and encourage responsibility and accountability among staff. To this end, the library enacted a pay-for-performance model to encourage better quality of services.

Pay-for-performance is a simple concept that can have great results in driving your organization to higher returns.  Rewarding top performers more highly than others has many obvious advantages, yet it has its drawbacks too, leading some to malign the approach. However, by anticipating and working around any perceived or real disadvantages, a modern, human resources-driven approach to pay-for-performance can succeed and flourish – improving staff performance while helping your organization reach its goals.

Many human-resource researchers agree that money can be a powerful incentive for employees to succeed – and businesses agree. A 2008 Hewitt Associates study cited in Entrepreneur Magazine noted that 90 percent of companies offer a “broad-based variable pay plan,” up from 51 percent in 1991.

Scholars and human resource consulting firms also note psychological theories that support the use of pay as a reward. Reinforcement theory posits that humans respond to rewards by driving themselves further, and expectancy theory notes that people will work harder because they expect to be able to buy the things that make them happy. Equity theory suggests that people expect to be paid commensurate with their level of expertise. These human-behavior concepts suggest that pay-for-performance improves satisfaction, rewards performance, attracts and retains talent, and aligns pay with meeting goals.

Yet pay-for-performance is not without its potential downsides. Such a compensation model can de-emphasize intrinsic rewards in work, leading to employees who only care for their paycheck in the end. The potential for “gaming the system” also becomes stronger as employees search for loopholes to boost their wages. Management hiccups, combined with confusion over job expectations, can lead to workers wondering why their pay wasn’t increased or complaining when organization resources aren’t available for boosting their performance properly.

When Loyola Notre Dame Library rolled out its pay-for-performance system, staff wanted significant explanations, education and training on why management was working with this new pay model. Staff considered the more frequent performance check-ins as cumbersome and difficult to prepare for during the school’s semesters, as they viewed the end of the academic and fiscal year as prime times for conducting performance reviews.

Yet the realized benefits have made the process beneficial and successful in the long run.  Loyola Notre Dame Library noted an increase in staff morale, as well as sharpened focus of both supervisors and staff in making sure that expectations are met. Employees began to ask management how they could improve their performance to receive higher merit increases, directly investing themselves in their work and incentivizing staff to strive for greater heights.

Many organizations also struggle with declining revenues or budget cuts, followed by an expectation of salary increases as an entitlement of employment. When money is not available for expected pay upgrades, discontent can occur. A pay-for-performance model avoids these issues by making pay dependent solely on the discretion of management. Employees who contribute the most to the organization are rewarded appropriately, allowing for limited money to go to employees who make the organization run the best.  In this economy, many public sector organizations are following the private sector’s lead in using such a model.  With a very limited pool allocated for pay increases, do you really want to be giving a tiny across-the-board increase to all employees, regardless of performance, when you could be more highly rewarding your top-performing employees?

This is not to say that employees shouldn’t have a voice in the determination of their salaries.  Proper training and education combined with ongoing coaching and feedback, self-evaluations, peer reviews, and periodic progress checks can keep the process fair to all.

Tying salaries to employee output can energize an organization and deliver results, improve employee satisfaction, and create cohesiveness between staff and employees that will deliver success throughout and for the entire organization.


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