Pay to Perform vs. Pay to Fail by Maksim Ovsyannikov - Krazzy HR, posted 21 May 2010
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Pay for performance
has been seen by many as a magic formula that will virtually guarantee
the implementation of a successful compensation strategy for any
organization. It makes sense. When employees perform according to
specific, well-defined measures, the business grows profitably and
employees are appropriately compensated. If employees don't perform, the
company doesn't pay. Unfortunately, it's not that easy.
has been seen by many as a magic formula that will virtually guarantee
the implementation of a successful compensation strategy for any
organization. It makes sense. When employees perform according to
specific, well-defined measures, the business grows profitably and
employees are appropriately compensated. If employees don't perform, the
company doesn't pay. Unfortunately, it's not that easy.
The U.S. Office of
Personnel Management certainly thought it was. After decades of building
pay scales based primarily on federal workers' seniority, the
government became a major proponent of pay for performance. Its example
encouraged many large companies to take the plunge. Unfortunately, few
government success stories have emerged. More often, pay-for-performance
programs have foundered, including the U.S. Defense Department's
National Security Personnel System (NSPS) a pay-for-performance plan
designed for 700,000 federal employees. In 2009, Congress repealed the
program and plans to transition all NSPS employees to existing civilian
personnel systems no later than Jan. 1, 2012.
Personnel Management certainly thought it was. After decades of building
pay scales based primarily on federal workers' seniority, the
government became a major proponent of pay for performance. Its example
encouraged many large companies to take the plunge. Unfortunately, few
government success stories have emerged. More often, pay-for-performance
programs have foundered, including the U.S. Defense Department's
National Security Personnel System (NSPS) a pay-for-performance plan
designed for 700,000 federal employees. In 2009, Congress repealed the
program and plans to transition all NSPS employees to existing civilian
personnel systems no later than Jan. 1, 2012.
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.
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.
At the Root
Traditional
compensation management is a flawed process often executed without
adequate supporting data. Talent leaders give managers budget guidelines
and expect them to allocate salaries and bonuses based almost entirely
on scores from annual reviews, then record compensation information in a
spreadsheet.
compensation management is a flawed process often executed without
adequate supporting data. Talent leaders give managers budget guidelines
and expect them to allocate salaries and bonuses based almost entirely
on scores from annual reviews, then record compensation information in a
spreadsheet.
Organizations that
believe people truly move the needle for their businesses need a more
innovative rewards program that integrates multiple measures of success
into a sophisticated management tool. The right compensation program
must be:
believe people truly move the needle for their businesses need a more
innovative rewards program that integrates multiple measures of success
into a sophisticated management tool. The right compensation program
must be:
a) Market competitive
and capable of fairly rewarding all employees and providing
strategically higher compensation to key performers.
and capable of fairly rewarding all employees and providing
strategically higher compensation to key performers.
b) Transparent and able
to offer the entire workforce visibility into how compensation
decisions are made and what people can expect to be paid if they do
well.
to offer the entire workforce visibility into how compensation
decisions are made and what people can expect to be paid if they do
well.
c) Performance based
and focused on real outcomes related to business performance, not simply
a performance review score, and able to draw upon formal and informal
measures that capture an employee's true contribution to organizational
success.
and focused on real outcomes related to business performance, not simply
a performance review score, and able to draw upon formal and informal
measures that capture an employee's true contribution to organizational
success.
It is critical that a
pay-for-performance program incorporate these cornerstone elements,
which work together to ensure success. For example, unless a company
offers market-competitive salaries and bonuses, it can't afford to be
transparent because the lack of competitiveness in the compensation
structure likely would cause employees to leave over time. Further,
transparency is required to communicate precisely what employees must
accomplish to earn rewards.
pay-for-performance program incorporate these cornerstone elements,
which work together to ensure success. For example, unless a company
offers market-competitive salaries and bonuses, it can't afford to be
transparent because the lack of competitiveness in the compensation
structure likely would cause employees to leave over time. Further,
transparency is required to communicate precisely what employees must
accomplish to earn rewards.
Paying for Failure
Without the
aforementioned three underpinnings in a properly structured
pay-for-performance program, organizations could indeed pay for failure
rather than for success, as the following examples illustrate.
aforementioned three underpinnings in a properly structured
pay-for-performance program, organizations could indeed pay for failure
rather than for success, as the following examples illustrate.
1. Running off the
road.
road.
In the book Hard Facts,
Dangerous Half-Truths and Total Nonsense: Profiting From Evidence-Based
Management by Jeffrey Pfeffer and Robert I. Sutton, the authors
describe a pay-for-performance plan implemented by the city of
Albuquerque, N.M., for its garbage collectors. Apparently, it was taking
too long to complete pickups each week, and as a result, the city was
paying a significant amount of overtime.
Dangerous Half-Truths and Total Nonsense: Profiting From Evidence-Based
Management by Jeffrey Pfeffer and Robert I. Sutton, the authors
describe a pay-for-performance plan implemented by the city of
Albuquerque, N.M., for its garbage collectors. Apparently, it was taking
too long to complete pickups each week, and as a result, the city was
paying a significant amount of overtime.
The city staff devised a
pay-for-performance plan that offered the garbage collectors bonuses if
they could complete their routes during an eight-hour day.
Unfortunately, this fostered two counterproductive behaviors:
pay-for-performance plan that offered the garbage collectors bonuses if
they could complete their routes during an eight-hour day.
Unfortunately, this fostered two counterproductive behaviors:
a) The garbage
collectors often exceeded the speed limits along their routes or on the
way to the recycling yard or dump.
collectors often exceeded the speed limits along their routes or on the
way to the recycling yard or dump.
b) The trucks made
fewer trips to dump their loads - leading to a high incidence of
dangerous overloads.
fewer trips to dump their loads - leading to a high incidence of
dangerous overloads.
The city of Albuquerque
just wanted the garbage collected on time and on budget, but it ended
up paying for heavily overloaded garbage trucks careening recklessly
through city streets, endangering the lives of local residents.
just wanted the garbage collected on time and on budget, but it ended
up paying for heavily overloaded garbage trucks careening recklessly
through city streets, endangering the lives of local residents.
2. Unseen crime.
New Orleans regularly
found itself ranked as having the highest murder rate in the United
States. Because New Orleans is dependent upon tourist revenue - and
tourists tend to avoid vacationing where the risk of being murdered is
so high it makes national headlines - the city instituted a
pay-for-performance program for its police force.
found itself ranked as having the highest murder rate in the United
States. Because New Orleans is dependent upon tourist revenue - and
tourists tend to avoid vacationing where the risk of being murdered is
so high it makes national headlines - the city instituted a
pay-for-performance program for its police force.
Unfortunately, it
turned out there are two ways to reduce the reported incidence of crime.
One is to actually reduce crime. The other is to underreport it. Human
nature chose the second path. So, while the city paid bonuses to the
police, the criminals were still in town, and New Orleans' murder rate
continued to rise - increasing 31 percent from 48 per thousand in 2006
to 63 per thousand in 2008.
turned out there are two ways to reduce the reported incidence of crime.
One is to actually reduce crime. The other is to underreport it. Human
nature chose the second path. So, while the city paid bonuses to the
police, the criminals were still in town, and New Orleans' murder rate
continued to rise - increasing 31 percent from 48 per thousand in 2006
to 63 per thousand in 2008.
3. Failing grade.
In the Chicago public
school system, students were underperforming. The system's board of
directors decided to institute merit pay for teachers, based on bringing
grade point averages up. Once again, human nature took over. Without
needed transparency in the process, audits later discovered many
teachers allowed students to cheat on tests to improve class GPAs.
Grades and teacher compensation went up, but learning did not.
school system, students were underperforming. The system's board of
directors decided to institute merit pay for teachers, based on bringing
grade point averages up. Once again, human nature took over. Without
needed transparency in the process, audits later discovered many
teachers allowed students to cheat on tests to improve class GPAs.
Grades and teacher compensation went up, but learning did not.
4. Taking stock.
In 2003, the New York Times suggested that to improve
shareholder value, CEOs should have their compensation tied to the
company's share prices. While that approach worked in some cases, many
CEOs became adept at driving the stock price up to coincide with the
dates on which their stock-option bonuses became available. The CEOs
benefited, but the company and the shareholders ended up shortchanged.
shareholder value, CEOs should have their compensation tied to the
company's share prices. While that approach worked in some cases, many
CEOs became adept at driving the stock price up to coincide with the
dates on which their stock-option bonuses became available. The CEOs
benefited, but the company and the shareholders ended up shortchanged.
All of these
pay-for-performance programs were missing a key building block - either
the appropriate transparency or real, employee-specific measures of
success rather than standard performance review scores. As a result,
instead of being paid to perform, people were actually paid to fail.
pay-for-performance programs were missing a key building block - either
the appropriate transparency or real, employee-specific measures of
success rather than standard performance review scores. As a result,
instead of being paid to perform, people were actually paid to fail.
Performance for the
21st Century
21st Century
There are some
guidelines talent leaders can use to create a performance-driven rewards
program that will foster a true culture of performance and
organizational excellence.
guidelines talent leaders can use to create a performance-driven rewards
program that will foster a true culture of performance and
organizational excellence.
1. Define a unique
formula for success.
formula for success.
Do not try to base a
pay-for-performance program solely on performance review scores or tie
each employee's compensation to the company's overall financial
performance. These measures may be part of it, but one must also define
unique formulas for success based on competencies, proficiencies or
performance tailored for each individual's role.
pay-for-performance program solely on performance review scores or tie
each employee's compensation to the company's overall financial
performance. These measures may be part of it, but one must also define
unique formulas for success based on competencies, proficiencies or
performance tailored for each individual's role.
For salespeople, that
can be relatively simple. A sales manager bases an employee's
compensation on the sales quotas he meets or exceeds. But for a business
consultant success criteria may be more challenging to identify. For
example, a company might base compensation on community feedback or
other measures of satisfaction regarding the programs or projects the
consultant has overseen for clients.
can be relatively simple. A sales manager bases an employee's
compensation on the sales quotas he meets or exceeds. But for a business
consultant success criteria may be more challenging to identify. For
example, a company might base compensation on community feedback or
other measures of satisfaction regarding the programs or projects the
consultant has overseen for clients.
Previously built
compensation management solutions cannot help organizations define and
measure the specific performance measures needed to work in today's
business environment. Talent managers must employ tools that incorporate
real measures of success from various talent processes - both formal
and informal - to ensure reward dollars are spent where they provide the
most value.
compensation management solutions cannot help organizations define and
measure the specific performance measures needed to work in today's
business environment. Talent managers must employ tools that incorporate
real measures of success from various talent processes - both formal
and informal - to ensure reward dollars are spent where they provide the
most value.
2. Reward potential
as well as existing behavior.
as well as existing behavior.
Once a properly
discriminating compensation program has been designed, is it better to
reward employees currently exhibiting the desired behavior? Or should
companies reward those with the potential to grow into the behavior -
thus improving the business' performance over time?
discriminating compensation program has been designed, is it better to
reward employees currently exhibiting the desired behavior? Or should
companies reward those with the potential to grow into the behavior -
thus improving the business' performance over time?
The answer is to do
both. Like maintaining a balanced investment portfolio, it's important
to achieve a balance with pay-for-performance programs by both
identifying current performers and motivating those who demonstrate they
can reach proposed standards in order to nurture the performance
required to succeed in the future.
both. Like maintaining a balanced investment portfolio, it's important
to achieve a balance with pay-for-performance programs by both
identifying current performers and motivating those who demonstrate they
can reach proposed standards in order to nurture the performance
required to succeed in the future.
3. Reward ability as
well as hard work.
well as hard work.
In many
pay-for-performance programs, rewards have largely been tied to effort. A
key goal in any organization is to motivate people to work harder, so
using the rewards "carrot" based on effort makes sense.
pay-for-performance programs, rewards have largely been tied to effort. A
key goal in any organization is to motivate people to work harder, so
using the rewards "carrot" based on effort makes sense.
But if talent managers
do decide to reward effort, they must also build ability into the
equation. Business success is s till based on results. And exceptionally
talented people may be able to achieve superior results with less
effort than others.
do decide to reward effort, they must also build ability into the
equation. Business success is s till based on results. And exceptionally
talented people may be able to achieve superior results with less
effort than others.
Traditional
pay-for-performance programs have failed because companies have
incorrectly assumed that by properly motivating everyone, effort would
dramatically improve and goals would always be achieved. This assumes
everyone has the same amount of ability, which is not the case. Talent
managers need to enable performance excellence, not simply attempt to
drive it by increasing the effort of the masses.
pay-for-performance programs have failed because companies have
incorrectly assumed that by properly motivating everyone, effort would
dramatically improve and goals would always be achieved. This assumes
everyone has the same amount of ability, which is not the case. Talent
managers need to enable performance excellence, not simply attempt to
drive it by increasing the effort of the masses.
Monkey Business
In Competing for the
Future, authors Gary Hamel and C. K. Prahalad describe an experiment
involving four monkeys in a cage. Researchers dangled a bunch of bananas
at the top of a pole in the center of the cage. But every time a monkey
tried to climb the pole to get to the bananas, he or she was hit with a
shower of extremely cold water.
Future, authors Gary Hamel and C. K. Prahalad describe an experiment
involving four monkeys in a cage. Researchers dangled a bunch of bananas
at the top of a pole in the center of the cage. But every time a monkey
tried to climb the pole to get to the bananas, he or she was hit with a
shower of extremely cold water.
One by one, the monkeys
tried to reach the bananas but only received a blast of cold water.
Eventually, they stopped trying, though the prize remained within reach.
tried to reach the bananas but only received a blast of cold water.
Eventually, they stopped trying, though the prize remained within reach.
After a time, a new
monkey was added to the cage. When the new monkey started up the pole,
the old monkeys yanked the surprised creature back down - sending the
message, "Don't waste your time trying to achieve higher goals." Even
once the entire population in the cage consisted of monkeys that had
never received the cold shower, the culture of not trying for anything
better remained.
monkey was added to the cage. When the new monkey started up the pole,
the old monkeys yanked the surprised creature back down - sending the
message, "Don't waste your time trying to achieve higher goals." Even
once the entire population in the cage consisted of monkeys that had
never received the cold shower, the culture of not trying for anything
better remained.
And so it is if there's
a negative culture within an organization, simply introducing positive
influencers won't drive the intended change. A poorly designed
compensation management program can actually reduce performance
dramatically if it is not focused on the right attributes for success,
and companies will end up paying for stunning failures instead of the
inspiring performance they hope to achieve.
a negative culture within an organization, simply introducing positive
influencers won't drive the intended change. A poorly designed
compensation management program can actually reduce performance
dramatically if it is not focused on the right attributes for success,
and companies will end up paying for stunning failures instead of the
inspiring performance they hope to achieve.
[About the Author: Maksim
Ovsyannikov is senior director of product strategy for Saba.]
Ovsyannikov is senior director of product strategy for Saba.]
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