FAQ-Pay for Performance

FAQ - Pay for Performance

 

Q.   What guidelines are used to make pay for performance fair and consistent?   What are other companies doing?

 

A.   Pay for Performance in some form or another is used by most companies in America, and you can find out a lot just by getting together with some HR managers at neighboring companies.   I strongly suggest you get together with a few people to see how they do it.

 

There are a million variations on pay for performance but the structure tends to be:

 

• An employee sets goals or objectives with their manager (these might include things like ''being on time'' or competencies like ''teamwork'')
• At the end of the year manager''s rate their employees on a scale of 1-5 or 1-7 based on how they did against their objectives
• The pay increment and/or a bonus is based on the rating there are certain controls, for example, only a certain number of people can get a 5 star rating, or there is an overall budget that a manager cannot exceed

• Typically, the manager''s boss reviews the ratings

 

While it all depends on how you measure it, dissatisfaction with pay for performance can be around 90%.   It simply doesn''t work very satisfactorily in most circumstances.   People have tried all kinds of different variations and except in special cases, nothing seems to work very well.   Hence, I wouldn''t invest much time in trying to create a ''great'' system.

 

Personally, I''m against pay for performance.   I think it just doesn''t work well enough to justify the pain involved.   That said, most people see no choice.   One alternative is to go ahead, but de-emphasize the program as much as possible--since you can''t get high satisfaction you can at least minimize the pain.

 

I suggest you read our interviews with Peter Block and Ed Lawler (search on Block or Lawler on our site).   Lawler''s book "Rewarding Excellence" is very good, although a bit wishy-washy on pay for performance.   He seems in favor of it but admits it rarely works and will work even less well in the future as we move towards more knowledge work.

 

You might also want to read the section on compensation in Elliott Jaques "Executive Leadership" or "Requisite Organization."   I think Jaques understands the reality of this as well as anyone.