While pay for performance can be a solution for some organizations in search of new compensation concepts, it's not the answer for every company. Design is important, and the downside can be steep.
By Janet Wiscombe
At a time of economic slowdowns and uncertainty, a compensation concept such as pay for performance is particularly tempting and increasingly popular. A recent survey by Hewitt Associates LLC found that nearly 8 in 10 companies have some kind of variable pay system, up from fewer than 5 in 10 in 1990. It's an understandable trend at a time when revenues slump, stock options shrivel, and across-the-board raises just aren't feasible for many organizations.
The question for HR people who wonder if they should follow suit is this: does pay for performance really work? The answer is that while pay for performance can work, it's not the solution for every organization.
The range of opinion about pay for performance is broad and deep. Its proponents say that rigorous, long-term pay-for-performance systems offer effective methods of helping companies continually improve the workforce while getting and keeping the best people. Opponents argue that incentive pay plans tend to pit employees against one another, erode trust and teamwork, and create what critics call dressed-up sweatshops.
Sometimes, it's bad even while it's good. Lisa Weber, executive vice president of human resources for MetLife, calls the shift to a pay-for-performance model "absolutely gut-wrenching. Some people hate it."
But after MetLife placed all employees on a rating scale that is subject to change based on the performance of specific goals and core behaviors, the company's return on equity jumped from 7 percent in 1998 to 10.5 percent in 2000. "It's been tough, but it's been fabulous," she says.
The concept of pay for performance isn't new. Ever since ancient Mesopotamians were paid by the basket for picking olives, there's been some form of performance-based pay. In the modern era, the term is used fairly loosely: commissions and bonuses are often thrown into the definition.
For the purposes of this story, pay for performance means a variable pay approach that is anchored to a measurement of performance, whether that's how many hours an attorney bills every month or a more subjective standard -- how well a manager fosters teamwork, for instance. Often, evaluations are based on best-to-worst forced ranking systems -- known to many employees as rank and yank -- which are thought to provide a way of identifying and rewarding strong performers and encouraging everyone to work harder and smarter. True pay for performance is more formalized than an occasional attaboy bonus. It is variable compensation that must be re-earned each year and doesn't permanently increase base salary.
What makes it work?
When it is measurable and objective: Pay for performance is not limited to such environments as assembly lines or the piecework arena. It can translate to any business, including banks, accountants, and legal firms, says Niki Somerset, a management consultant in Virginia Beach, Virginia, who has helped many businesses move from a straight salary plan to a performance-based program. "Incentive pay has always been quietly done in boardrooms," she says. "If you've got 250 attorneys in 30 cities, you've got to set projections, people have to be productive. Billable hours are the ticket."
MetLife measures employees and managers by comparing each person to others who are on the same level. Employees are measured on a 1-to-5 scale. The company then calculates which employees are at the top, in the middle, and at the bottom. Employees who rate a 3 receive about 65 percent more in bonuses than those who earn a 2. A person rated 3 might receive a bonus of $6,900, whereas one who was rated 2 would get $4,200.
The company is concentrating a great deal of attention on the most senior 250 of the organization's 46,393 employees, says Weber. They are evaluated on their individual performance results and on questions such as: Do they show partnership? Do they demonstrate teamwork? Do they create heroes? How dedicated are they to learning and development?
Synygy, Inc., the largest provider of incentive management software and services, implemented its own plan a couple of years after the company was founded in 1991. Company spokesman Oliver Picher describes it as a bonus program that ranges in amount from 5 to 100 percent of an employee's base salary and is paid quarterly. Evaluation ratings are set by a "mentor" (supervisor), and also by coworkers who use an appraisal system called OPTIC: Ownership, Professionalism, Teamwork, (Continuous) Improvement, and Client Focus.
Employees are rated on a 1-to-5 scale. Objectives are set at the beginning of the quarter and at the end, and everyone in the company participates -- whether clerical worker or top executive. As director of public relations, Picher says, he is evaluated on responsibilities that apply to his specific job, such as the number and quality of press releases and their impact, and the contacts he's made with specific people and organizations.
When it is designed for whole-company success: Pay for performance is often criticized for tilting a company toward one measure and away from another. Individual goals can pit workers against each other. A plan that focuses only on output will invariably suffer in the area of quality.
At MetLife, the focus is on individual performance, but "it's not OK to step on people's toes," Weber says. "You must rate high on partnership and teamwork. If you're a great performer but a terrible team player, you won't do well."
Financial results shouldn't be the only measure for pay-for-performance success, says Margaret Bentson, principal compensation manager at Hewitt Associates, San Francisco. Customer service should also be considered, with a scoring system that might include such factors as on-time delivery, reduction in the number of returned products, and client satisfaction surveys. "The idea is to marry the fortunes of the employee to the performance of the company."
When employees have a sizable stake in the action: At Nucor Corporation, the largest steel producer in the United States, the secret to success is to give huge bonuses of 100 or even 150 to 160 percent, says James M. Coblin, vice president of human resources. "That's when employees catch fire."
The Charlotte, North Carolina, company -- which employs 8,000 people at 22 plants in nine states -- has the highest productivity, the highest wages, and the lowest labor costs per ton in the American steel industry. The average pay in the year 2000 was $63,000 for a steel mill employee. Coblin says the program succeeds because every employee can see how the incentive arrangement affects his wages each week.
During the down times, of course, there's also sharing. The company doesn't lay people off, Coblin says. Rather, the plant shuts down its production lines for a day or two a week. Salaried executives still work; hourly employees aren't required to. About 80 percent of Nucor's employees are on this production-incentive plan. Other employees also have performance-based compensation.
When the whole organization is involved: "To make it work, the most important thing is the involvement of the whole company," Somerset says. "Even if there's only a 1 percent profit, it should be divided among everyone, including the administration. Everyone is part of the team-building." Nucor, for instance, gives non-production employees other awards -- from free dinners for outstanding work to one share of stock for every year of employment.
Involvement of another kind has been a key to success in Colorado's Douglas County School District, which has one of the oldest and most extensive pay-for-performance programs in the country. The program works, in part, because of the enormous effort that was invested in developing the system over a two-year period, says Douglas Hartman, the district's HR director. That built confidence among teachers long before the plan was implemented, he says.
Another reason for the success of the plan, now in its eighth year, is that the school district funds the program internally. "We are not dependent on outside grants or legislative programs," Hartman says. "That's one of the big reasons it's been a success in attracting, retaining, and rewarding the best teachers. Our plan is consistent and reliable."
When there are clear expectations: At MetLife, "there is a lot more honesty in this process," Weber says. "It forces a level of openness. People meet expectations and know where they stand. The message is this: it pays to be a high performer." Weber credits the company's new pay-for-performance program as "the driving force behind our cultural transformation. We have created an environment where the top performers can thrive. No one here is 'entitled' to anything." Since the new pay system was instituted, turnover has dropped and is now 12 percent, Weber says. It is only 6 percent among the top performers.
At Synygy, "everyone knows there's an evaluation and who gives it," Picher says. "There are no surprises. What's important is that you have to evaluate people on a regular basis. People have to know why you're doing it so they can make adjustments and their job is under their control."
When there is commitment to training and support: "Pay for performance requires more of a commitment to training or it will not work," Somerset says. "And it may require more administrative support."
When does pay for performance fall short?
When it pits employees against each other: This is the biggest problem with pay for performance, says Stanford University professor Jeffrey Pfeffer, who has researched the subject extensively and declares pay for performance "a myth."
"A company's success is not a consequence of what an individual does. It's a consequence of what the system does," says Pfeffer, the Thomas D. Dee professor of organizational behavior at the Stanford Business School.
"These programs do more damage than good," agrees Marc Holzer, a Rutgers University business professor and president of the American Society for Public Administration. He's watched agencies and schools trot out various compensation schemes, try them out, keep them, change them, and abandon them.
"They set up competition between people. They emphasize the individual rather than the team. Virtually all innovations are group efforts. Yes, the exceptional person should be rewarded. But that exceptional person is dependent on others, on support services, which is often ignored."
"Incentive pay is toxic.... By the early nineties, I was spending 95 percent of my time on conflict resolution instead of on how to serve our customers," says Pat Lancaster, the chairman of Lantech, a manufacturer of packaging machinery with 325 employees, who is quoted by Pfeffer in his book The Human Equation: Building Profits by Putting People First (Harvard Business School Press, 1998). What the system bred wasn't profits, Lancaster told Pfeffer, but greedy rival gangs of workers.
The competitive aspects of pay for performance have made it a hotly contested issue in public agencies, including some school systems. New York Mayor Rudolph Giuliani proposed an individual merit pay program last year, drawing the ire of United Federation of Teachers/New York president Randi Weingarten. She says Giuliani's plan would worsen potential teacher shortages. "Classrooms aren't factories, and teachers don't do piecework," she says. "To do their work well, educators need to collaborate -- not compete -- with their colleagues."
Pfeffer says evidence indicates that incentive compensation may be more effective at a divisional or organizational rather than an individual level. "Profit sharing, stock ownership, gain sharing, and group bonuses seem more consistently to produce positive results than do individually based incentive schemes."
When it pushes one outcome to the detriment of others: Highly competitive pay systems tend to promote far less beneficial qualities, Pfeffer says. "Sears tried it and got in trouble." As he explains in his book, "Sears abandoned a commission system at its automobile repair stores when California officials found widespread evidence of consumer fraud, with employees recommending unneeded repairs to unsuspecting customers, for example."
Pfeffer says organizations that have tried and subsequently abandoned performance-for-pay plans cite problems that include overly aggressive salespeople who alienate consumers, and high turnover rates.
Despite past problems with its commission system in the company's auto repair stores, Sears spokeswoman Peggy Palter says, "That was just a small part of our business." The company is still very much in favor of pay for performance, she notes, "and has been very pleased with the results." Over the years, Palter says, Sears has continued to update and improve its compensation system, and has developed different approaches for different parts of the company -- the credit and retail divisions, for example. "We now incent on customer service scores," she says, adding that customer service improvements have been rapid because of bonus pay for performance.
When it is too subjective: Weber says that subjectivity in ratings is the most controversial part of MetLife's process. "If one manager rates an employee 3, but his boss rates the same person 2, there's a lot of blaming. The manager goes back to the employee and says, 'I rated you 3, but so-and-so only gave you 2.'"
At Enron, a Texas energy company, workers are divided into five categories, from "superior" (5 percent) to "needs improvement" (15 percent), according to a recent Time magazine story. Enron's widely cited approach, for example, which attempts to create a rating system that is less subjective and arbitrary, doesn't depend on the views or whims of any individual supervisor. Workers can turn in self-assessments and choose up to seven colleagues and clients to write evaluations on their behalf. And anyone in the company can voluntarily submit a review of anyone else's performance.
When it is so subjective that it opens the company to allegations of bias: Former and current employees at Microsoft, Ford, and Conoco have filed lawsuits, alleging that the forced-ranking systems used by those companies to award bonuses and weed out underperformers were biased against some groups of workers: white males over blacks or women, for example, or younger managers over older ones.
Can you make it work?
If you are going to embark on a pay-for-performance plan, look at these generally accepted principles:
· Success depends on the willingness of individual managers to make objective assessments of their employees.
· Managers must be willing to differentiate between performances that meet expectations and those that exceed -- or fall short of -- expectations.
· Competency-based systems should measure an employee's performance against a set of core behaviors that have a proven impact on business.
· Payouts should be made quarterly or at least more often than annually.
· There must be follow-up evaluations.
· The plan must be communicated clearly, frequently, and simply.
· Success depends on training, reinforcement, and company-wide commitment.
A Hewitt Associates study released last year gives pay for performance mixed reviews. More companies are using the incentive plan now than in 1990, but only 22 percent said they believe that pay incentives work. Twenty-one percent of the companies surveyed said they did not think it helped; 57 percent said it "somewhat helped." An earlier Hewitt survey, conducted in 1995, found that among the 61 percent of organizations in the sample that had adopted variable compensation plans with budgets of $5 million or more, 48 percent of the plans failed to achieve their goals.
In his book, Pfeffer relates that, despite their popularity, most plans share two attributes: They absorb vast amounts of management time and resources, and they make everyone unhappy.
And yet MetLife is thrilled with its program, Weber says. "It's tough stuff," she adds. "But I go out on tour and I ask people all over the country to raise their hand if they're satisfied with the plan. Everyone raises his or her hand. It's not all about money. It's how you feel inside. We still have work to do on the program. To make something an institution, you have to change hearts as well as minds."
Whatever HR professionals decide to do about pay for performance, Pfeffer urges them to keep this in mind: "Many studies strongly suggest that this form of reward (individual incentive pay) undermines teamwork, encourages a short-term focus, and leads people to believe that pay is not related to performance at all but to having the 'right' relationships and an ingratiating personality."
That suggests that the only way pay for performance can work is if it rewards teamwork and long-term focus, and is designed to be as objective and fair as possible. Some proponents obviously think that's possible. Critics like Pfeffer think the idea is inherently flawed, and that it ignores another reason people work: "for meaning in their lives."
"In fact," he adds, "people work to have fun." Companies that ignore this fact are "essentially bribing their employees and will pay the price in a lack of loyalty and commitment."
Jay Schuster, a partner in Schuster-Zingheim and Associates, Inc., in Los Angeles and co-author of Pay People Right! (Jossey-Bass, 2000), has argued with Pfeffer about pay for years. "Pfeffer is right. People do work for more than pay," he says. "But what they are concerned with is this: a compelling future, a positive workplace, individual growth, and total pay.
"The organizations that do indeed truly reward people consistently for performance outperform those that don't," Schuster adds. "My sense is, if you're not going to pay for performance, what are you going to pay for?"
It is a question that has no easy answer. But most of those close to the issue would agree with Pfeffer when he warns that the one thing above all others that can potentially inflict the most damage on an organization is to tamper with its pay system. When considering such a major decision, the first principle for the HR professional to address should be this: First, do no harm.
Workforce, August 2001, pp. 28-34 -- Subscribe Now!
Janet Wiscombe is Associate Editor for Workforce.
From India, Bangalore
By Janet Wiscombe
At a time of economic slowdowns and uncertainty, a compensation concept such as pay for performance is particularly tempting and increasingly popular. A recent survey by Hewitt Associates LLC found that nearly 8 in 10 companies have some kind of variable pay system, up from fewer than 5 in 10 in 1990. It's an understandable trend at a time when revenues slump, stock options shrivel, and across-the-board raises just aren't feasible for many organizations.
The question for HR people who wonder if they should follow suit is this: does pay for performance really work? The answer is that while pay for performance can work, it's not the solution for every organization.
The range of opinion about pay for performance is broad and deep. Its proponents say that rigorous, long-term pay-for-performance systems offer effective methods of helping companies continually improve the workforce while getting and keeping the best people. Opponents argue that incentive pay plans tend to pit employees against one another, erode trust and teamwork, and create what critics call dressed-up sweatshops.
Sometimes, it's bad even while it's good. Lisa Weber, executive vice president of human resources for MetLife, calls the shift to a pay-for-performance model "absolutely gut-wrenching. Some people hate it."
But after MetLife placed all employees on a rating scale that is subject to change based on the performance of specific goals and core behaviors, the company's return on equity jumped from 7 percent in 1998 to 10.5 percent in 2000. "It's been tough, but it's been fabulous," she says.
The concept of pay for performance isn't new. Ever since ancient Mesopotamians were paid by the basket for picking olives, there's been some form of performance-based pay. In the modern era, the term is used fairly loosely: commissions and bonuses are often thrown into the definition.
For the purposes of this story, pay for performance means a variable pay approach that is anchored to a measurement of performance, whether that's how many hours an attorney bills every month or a more subjective standard -- how well a manager fosters teamwork, for instance. Often, evaluations are based on best-to-worst forced ranking systems -- known to many employees as rank and yank -- which are thought to provide a way of identifying and rewarding strong performers and encouraging everyone to work harder and smarter. True pay for performance is more formalized than an occasional attaboy bonus. It is variable compensation that must be re-earned each year and doesn't permanently increase base salary.
What makes it work?
When it is measurable and objective: Pay for performance is not limited to such environments as assembly lines or the piecework arena. It can translate to any business, including banks, accountants, and legal firms, says Niki Somerset, a management consultant in Virginia Beach, Virginia, who has helped many businesses move from a straight salary plan to a performance-based program. "Incentive pay has always been quietly done in boardrooms," she says. "If you've got 250 attorneys in 30 cities, you've got to set projections, people have to be productive. Billable hours are the ticket."
MetLife measures employees and managers by comparing each person to others who are on the same level. Employees are measured on a 1-to-5 scale. The company then calculates which employees are at the top, in the middle, and at the bottom. Employees who rate a 3 receive about 65 percent more in bonuses than those who earn a 2. A person rated 3 might receive a bonus of $6,900, whereas one who was rated 2 would get $4,200.
The company is concentrating a great deal of attention on the most senior 250 of the organization's 46,393 employees, says Weber. They are evaluated on their individual performance results and on questions such as: Do they show partnership? Do they demonstrate teamwork? Do they create heroes? How dedicated are they to learning and development?
Synygy, Inc., the largest provider of incentive management software and services, implemented its own plan a couple of years after the company was founded in 1991. Company spokesman Oliver Picher describes it as a bonus program that ranges in amount from 5 to 100 percent of an employee's base salary and is paid quarterly. Evaluation ratings are set by a "mentor" (supervisor), and also by coworkers who use an appraisal system called OPTIC: Ownership, Professionalism, Teamwork, (Continuous) Improvement, and Client Focus.
Employees are rated on a 1-to-5 scale. Objectives are set at the beginning of the quarter and at the end, and everyone in the company participates -- whether clerical worker or top executive. As director of public relations, Picher says, he is evaluated on responsibilities that apply to his specific job, such as the number and quality of press releases and their impact, and the contacts he's made with specific people and organizations.
When it is designed for whole-company success: Pay for performance is often criticized for tilting a company toward one measure and away from another. Individual goals can pit workers against each other. A plan that focuses only on output will invariably suffer in the area of quality.
At MetLife, the focus is on individual performance, but "it's not OK to step on people's toes," Weber says. "You must rate high on partnership and teamwork. If you're a great performer but a terrible team player, you won't do well."
Financial results shouldn't be the only measure for pay-for-performance success, says Margaret Bentson, principal compensation manager at Hewitt Associates, San Francisco. Customer service should also be considered, with a scoring system that might include such factors as on-time delivery, reduction in the number of returned products, and client satisfaction surveys. "The idea is to marry the fortunes of the employee to the performance of the company."
When employees have a sizable stake in the action: At Nucor Corporation, the largest steel producer in the United States, the secret to success is to give huge bonuses of 100 or even 150 to 160 percent, says James M. Coblin, vice president of human resources. "That's when employees catch fire."
The Charlotte, North Carolina, company -- which employs 8,000 people at 22 plants in nine states -- has the highest productivity, the highest wages, and the lowest labor costs per ton in the American steel industry. The average pay in the year 2000 was $63,000 for a steel mill employee. Coblin says the program succeeds because every employee can see how the incentive arrangement affects his wages each week.
During the down times, of course, there's also sharing. The company doesn't lay people off, Coblin says. Rather, the plant shuts down its production lines for a day or two a week. Salaried executives still work; hourly employees aren't required to. About 80 percent of Nucor's employees are on this production-incentive plan. Other employees also have performance-based compensation.
When the whole organization is involved: "To make it work, the most important thing is the involvement of the whole company," Somerset says. "Even if there's only a 1 percent profit, it should be divided among everyone, including the administration. Everyone is part of the team-building." Nucor, for instance, gives non-production employees other awards -- from free dinners for outstanding work to one share of stock for every year of employment.
Involvement of another kind has been a key to success in Colorado's Douglas County School District, which has one of the oldest and most extensive pay-for-performance programs in the country. The program works, in part, because of the enormous effort that was invested in developing the system over a two-year period, says Douglas Hartman, the district's HR director. That built confidence among teachers long before the plan was implemented, he says.
Another reason for the success of the plan, now in its eighth year, is that the school district funds the program internally. "We are not dependent on outside grants or legislative programs," Hartman says. "That's one of the big reasons it's been a success in attracting, retaining, and rewarding the best teachers. Our plan is consistent and reliable."
When there are clear expectations: At MetLife, "there is a lot more honesty in this process," Weber says. "It forces a level of openness. People meet expectations and know where they stand. The message is this: it pays to be a high performer." Weber credits the company's new pay-for-performance program as "the driving force behind our cultural transformation. We have created an environment where the top performers can thrive. No one here is 'entitled' to anything." Since the new pay system was instituted, turnover has dropped and is now 12 percent, Weber says. It is only 6 percent among the top performers.
At Synygy, "everyone knows there's an evaluation and who gives it," Picher says. "There are no surprises. What's important is that you have to evaluate people on a regular basis. People have to know why you're doing it so they can make adjustments and their job is under their control."
When there is commitment to training and support: "Pay for performance requires more of a commitment to training or it will not work," Somerset says. "And it may require more administrative support."
When does pay for performance fall short?
When it pits employees against each other: This is the biggest problem with pay for performance, says Stanford University professor Jeffrey Pfeffer, who has researched the subject extensively and declares pay for performance "a myth."
"A company's success is not a consequence of what an individual does. It's a consequence of what the system does," says Pfeffer, the Thomas D. Dee professor of organizational behavior at the Stanford Business School.
"These programs do more damage than good," agrees Marc Holzer, a Rutgers University business professor and president of the American Society for Public Administration. He's watched agencies and schools trot out various compensation schemes, try them out, keep them, change them, and abandon them.
"They set up competition between people. They emphasize the individual rather than the team. Virtually all innovations are group efforts. Yes, the exceptional person should be rewarded. But that exceptional person is dependent on others, on support services, which is often ignored."
"Incentive pay is toxic.... By the early nineties, I was spending 95 percent of my time on conflict resolution instead of on how to serve our customers," says Pat Lancaster, the chairman of Lantech, a manufacturer of packaging machinery with 325 employees, who is quoted by Pfeffer in his book The Human Equation: Building Profits by Putting People First (Harvard Business School Press, 1998). What the system bred wasn't profits, Lancaster told Pfeffer, but greedy rival gangs of workers.
The competitive aspects of pay for performance have made it a hotly contested issue in public agencies, including some school systems. New York Mayor Rudolph Giuliani proposed an individual merit pay program last year, drawing the ire of United Federation of Teachers/New York president Randi Weingarten. She says Giuliani's plan would worsen potential teacher shortages. "Classrooms aren't factories, and teachers don't do piecework," she says. "To do their work well, educators need to collaborate -- not compete -- with their colleagues."
Pfeffer says evidence indicates that incentive compensation may be more effective at a divisional or organizational rather than an individual level. "Profit sharing, stock ownership, gain sharing, and group bonuses seem more consistently to produce positive results than do individually based incentive schemes."
When it pushes one outcome to the detriment of others: Highly competitive pay systems tend to promote far less beneficial qualities, Pfeffer says. "Sears tried it and got in trouble." As he explains in his book, "Sears abandoned a commission system at its automobile repair stores when California officials found widespread evidence of consumer fraud, with employees recommending unneeded repairs to unsuspecting customers, for example."
Pfeffer says organizations that have tried and subsequently abandoned performance-for-pay plans cite problems that include overly aggressive salespeople who alienate consumers, and high turnover rates.
Despite past problems with its commission system in the company's auto repair stores, Sears spokeswoman Peggy Palter says, "That was just a small part of our business." The company is still very much in favor of pay for performance, she notes, "and has been very pleased with the results." Over the years, Palter says, Sears has continued to update and improve its compensation system, and has developed different approaches for different parts of the company -- the credit and retail divisions, for example. "We now incent on customer service scores," she says, adding that customer service improvements have been rapid because of bonus pay for performance.
When it is too subjective: Weber says that subjectivity in ratings is the most controversial part of MetLife's process. "If one manager rates an employee 3, but his boss rates the same person 2, there's a lot of blaming. The manager goes back to the employee and says, 'I rated you 3, but so-and-so only gave you 2.'"
At Enron, a Texas energy company, workers are divided into five categories, from "superior" (5 percent) to "needs improvement" (15 percent), according to a recent Time magazine story. Enron's widely cited approach, for example, which attempts to create a rating system that is less subjective and arbitrary, doesn't depend on the views or whims of any individual supervisor. Workers can turn in self-assessments and choose up to seven colleagues and clients to write evaluations on their behalf. And anyone in the company can voluntarily submit a review of anyone else's performance.
When it is so subjective that it opens the company to allegations of bias: Former and current employees at Microsoft, Ford, and Conoco have filed lawsuits, alleging that the forced-ranking systems used by those companies to award bonuses and weed out underperformers were biased against some groups of workers: white males over blacks or women, for example, or younger managers over older ones.
Can you make it work?
If you are going to embark on a pay-for-performance plan, look at these generally accepted principles:
· Success depends on the willingness of individual managers to make objective assessments of their employees.
· Managers must be willing to differentiate between performances that meet expectations and those that exceed -- or fall short of -- expectations.
· Competency-based systems should measure an employee's performance against a set of core behaviors that have a proven impact on business.
· Payouts should be made quarterly or at least more often than annually.
· There must be follow-up evaluations.
· The plan must be communicated clearly, frequently, and simply.
· Success depends on training, reinforcement, and company-wide commitment.
A Hewitt Associates study released last year gives pay for performance mixed reviews. More companies are using the incentive plan now than in 1990, but only 22 percent said they believe that pay incentives work. Twenty-one percent of the companies surveyed said they did not think it helped; 57 percent said it "somewhat helped." An earlier Hewitt survey, conducted in 1995, found that among the 61 percent of organizations in the sample that had adopted variable compensation plans with budgets of $5 million or more, 48 percent of the plans failed to achieve their goals.
In his book, Pfeffer relates that, despite their popularity, most plans share two attributes: They absorb vast amounts of management time and resources, and they make everyone unhappy.
And yet MetLife is thrilled with its program, Weber says. "It's tough stuff," she adds. "But I go out on tour and I ask people all over the country to raise their hand if they're satisfied with the plan. Everyone raises his or her hand. It's not all about money. It's how you feel inside. We still have work to do on the program. To make something an institution, you have to change hearts as well as minds."
Whatever HR professionals decide to do about pay for performance, Pfeffer urges them to keep this in mind: "Many studies strongly suggest that this form of reward (individual incentive pay) undermines teamwork, encourages a short-term focus, and leads people to believe that pay is not related to performance at all but to having the 'right' relationships and an ingratiating personality."
That suggests that the only way pay for performance can work is if it rewards teamwork and long-term focus, and is designed to be as objective and fair as possible. Some proponents obviously think that's possible. Critics like Pfeffer think the idea is inherently flawed, and that it ignores another reason people work: "for meaning in their lives."
"In fact," he adds, "people work to have fun." Companies that ignore this fact are "essentially bribing their employees and will pay the price in a lack of loyalty and commitment."
Jay Schuster, a partner in Schuster-Zingheim and Associates, Inc., in Los Angeles and co-author of Pay People Right! (Jossey-Bass, 2000), has argued with Pfeffer about pay for years. "Pfeffer is right. People do work for more than pay," he says. "But what they are concerned with is this: a compelling future, a positive workplace, individual growth, and total pay.
"The organizations that do indeed truly reward people consistently for performance outperform those that don't," Schuster adds. "My sense is, if you're not going to pay for performance, what are you going to pay for?"
It is a question that has no easy answer. But most of those close to the issue would agree with Pfeffer when he warns that the one thing above all others that can potentially inflict the most damage on an organization is to tamper with its pay system. When considering such a major decision, the first principle for the HR professional to address should be this: First, do no harm.
Workforce, August 2001, pp. 28-34 -- Subscribe Now!
Janet Wiscombe is Associate Editor for Workforce.
From India, Bangalore
Hi!
I suggest you read (or attend a seminar) on W. Mercer's Three P's in Compensation Management.
In this area, W. Mercer argues out very well their proposition that organizations must use the THREE Ps (person, position, and performance) as basis for their compensation and rewards.
Best wishes.
Ed Llarena, Jr.
Managing Partner
Emilla Consulting
From Philippines, Parañaque
89I suggest you read (or attend a seminar) on W. Mercer's Three P's in Compensation Management.
In this area, W. Mercer argues out very well their proposition that organizations must use the THREE Ps (person, position, and performance) as basis for their compensation and rewards.
Best wishes.
Ed Llarena, Jr.
Managing Partner
Emilla Consulting
From Philippines, Parañaque
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