Skilled workers are hard to find – and keep.
Because of this, it’s little wonder employers are taking a fresh look at so-called “pay-for-performance” (P4P) arrangements that link part of employee compensation to workplace achievement. Such programs attract “A-players” and keep them from seeking greener pastures. At the same time, their higher productivity can boost the company’s bottom line.
“Pay-for-performance programs are powerful motivators,” says Mae Lon Ding, president of Personnel Systems Associates. “They guide employees by highlighting what is really important in their job positions. And they demonstrate that working at the peak of an individual’s abilities will be worth the effort.”
Incentive pay has important advantages over seniority-based salary hikes and year-end bonus plans.
“Under traditional compensation programs, employees realize that if they are good enough to survive they will earn the same pay as the company’s best performers,” says Steven P. Lentini, corporate leadership and sales coach.
That realization, he says, encourages mediocrity and dampens the morale of a company’s top talent who end up jumping ship for the competition.
In contrast, the measurable nature of P4P programs helps build an achievement-based work culture, while ensuring that management and staff are on the same page when it comes to goals, expectations and outcomes. They can even improve a company’s system of employee review.
“A P4P program can really help companies weed out underperformers, reward the top players and identify those in the middle of the pack,” says Catherine Rymsha, visiting lecturer on management at the University of Massachusetts Lowell.
Finally, compensation-based pay holds a special attraction to the fastest-growing segment of the prospect pool: Gen Zers.
“People in their 20s have very clear expectations about how they want to control their careers,” says Daniel Moynihan, managing director at Pearl Meyer, a company working with organizations to design and implement compensation and leadership strategies. “Giving them a modicum of compensation control does just that.”
Avoid pitfalls
As attractive as they are, P4P programs can be tricky to design well. Poorly implemented ones fail to reward good performers adequately, leading to costly morale issues.
The biggest cause of failure is a lack of sufficient attention to the critical task of carefully selecting performance goals, while presenting them in the moderating context of larger company values.
“I think the biggest reason that performance-based compensation programs don’t work is that the managers have not identified the possibility of unintended consequences,” says Chad Prinkey, founder and CEO of Well Built Construction Consulting. “It’s great that people become focused on unlocking additional performance-based compensation. But what happens when they pursue the bonus at all costs, throwing other business priorities aside?”
Prinkey gives an example: “It can be dangerous to have project managers and superintendents earn additional compensation solely on profitability,” he says. “They have way more responsibilities than that, including quality and safety.”
Too much emphasis on the bottom line, in other words, can backfire in the form of rising accidents, shoddy customer service and defective goods.
And how about the costly ramifications of salespeople who push too hard?
“Employees too attached to outcomes can fall into the trap of pushing too aggressively for revenues, with the result that customers get turned off,” Lentini says. “Or they might drop prices to make their revenue targets but end up losing money.”
There are several general guidelines from workplace experts on how to avoid these pitfalls:
• Encourage employee buy-in.
P4P initiatives will only work if employees are enthused about the possibilities. Encourage their investment in the program by involving them in the initial planning stages, working one-on-one to develop performance parameters that are appropriate, realistic and inspiring.
“Let subordinates suggest how they can achieve measurable results that will support larger departmental and company-wide objectives,” Ding says.
• Think outside the box.
While most people think first of revenue goals, other categories can be equally important.
What about productivity levels? Cost reductions? Quality as measured by error levels and customer feedback?
• Create achievable goals.
“A rule of thumb is that employees should feel they have an 80 percent probability of achieving their assigned standards or objectives,” Ding says. “So, it’s really important for managers to convince their people that the bar has been set correctly, that they have a high probability of success and that supervisors will help them succeed.”