First Ever Talent Anarchy Guest Post: Pay for Performance

A few weeks ago, we were approached by the folks at Halogen Software about providing a guest post to this blog.  We haven’t had guest posts in the past.  Not that we’ve not been interested in them, but we suspect that our format makes people a little nervous.  Here’s how it works: you send a guest post, we respond (and we’re a little unpredictable).  They were game, so we figured, what the hell.  So, here is the first ever guest post to our blog.  Quick disclaimer: We aren’t posting this as an endorsement of Halogen Software.  But, they must be a cool organization if they have the guts to engage the Anarchists.

Joe and Jason,

I’m curious to know what you guys think of pay for performance programs.

At a high level, they seem to be the perfect solution for fostering and rewarding employee high performance. Simply put, pay for performance programs tie some or all of an employee’s compensation to their performance.

In theory, that’s great. The better I perform, the better I achieve or exceed at completing the goals laid out for me, the more I’m remunerated. And if my co-worker doesn’t put in the same amount of time, effort and energy as I do, they don’t get the same level of compensation.

But there are lots of challenges around pay for performance.

First, you need to be sure that you are doing a good job of setting goals. If they’re not achievable or within the employee’s span of control, tying their compensation to achievement of those goals could be a disincentive rather than an incentive. I think if you’re going to implement a pay for performance program, you first need to ensure that employees are assigned SMART goals (specific, measurable, achievable, relevant, time bound) Do you punish an employee by not giving them their bonus or salary increase because some outside force prevented them from achieving their goals? But you also can’t err on the side of creating goals that are too safe or easy to achieve. If you do this, you won’t stretch your employee and challenge them to grow and develop, or take risks; you encourage mediocrity instead of excellence.

Next, you need to be sure that you’re evaluating employee performance in as fair and consistent a way as possible. That can be hard to do when performance ratings can be a subjective thing. To be fair in administering a pay for performance program, the organization would need to have a clear definition of the various levels of performance and some way to ensure that managers are adhering to that scale when evaluating their employees. (OK I know you guys hate that stuff to begin with, but how else do you determine whether an employee is deserving of their “bonus”, or how much of a salary increase to grant them?)

I think you also need to be careful that you reward desirable behaviors, not just the attainment of goals. It’s not just “what” you accomplish, it’s “how”. We’ve all heard stories about individuals who achieve or exceed their goals, but do so at the expense of others, sometimes employing unethical means. Having a strong competency management program can help, and factoring in the performance of competencies in your pay for performance criteria. But what else do you need?

For a pay for performance program to work and be fair, I think managers need to consider more than just performance in their decision making. They should also consider things like performance history, salary history, salary scales/comparisons, guidelines for bonuses or increases, etc. But what about things like the employee’s life circumstances, or development curve, or experience level? Should these be factored into the decision making as well?

And what about considering what the employee finds valuable and motivating? I might be motivated by more time off, or additional training/development, or the ability to work from home more than I am by a bonus or salary increase.

What do you think? Do pay for performance programs actually help motivate high performance? What do we need to do to make them effective?

Sean Conrad is a Senior Product Analyst at Halogen Software, a market leading provider of performance appraisal software. He likes to stir the pot and challenge managers to adopt talent management best practices. You can read some of his other posts on the Halogen blog.

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