Should you link pay to performance?
On the surface, paying for performance and incentivising employees monetarily may seem like a smart business approach.
But effectively linking pay to performance is a bit more complicated and requires analysis to determine if it’s a compensation plan your company should implement.
According to a recent Fortune article, only 32% of managers reported that their pay to performance programs are “effective at differentiating pay based on individual performance”. This number is based on the 2015 Talent Management and Rewards Pulse Survey conducted by Willis Towers Watson.
This doesn’t mean I’m saying pay to performance doesn’t work – it just needs to be done right, and in the right setting.
So why link pay to performance?
- Goal-focused work: Employees gear their time and energy toward specific, important business outcomes.
- Recruitment and retention: Top talent will be drawn to opportunities where they can shine and will be inclined to stay if they’re recognised for their contributions.
- Employee engagement: When employees feel a part of the overall company strategy, they are more engaged and invested in their work.
For some companies, like Apple, linking pay to performance is a perfect way to propel the business forward. And for others, it causes misalignment and an unhealthy work environment.
So let’s take a deeper look at Four Key Elements to determine if linking pay to performance is right for you and your team.
1. Desired Outcomes
When providing monetary incentives, you have to be careful about what you are encouraging and perhaps discouraging at the same time.
In a recent Harvard Business Review article, Dan Cable and Freek Vermeulen write, “The problem is that once you link someone’s financial rewards to a particular measure or set of measures, it is going to affect that person’s behaviour – in terms of what they do, and don’t do.”
In other words, you want to be deliberate and cautious about what outcomes you are incentivising. For example, if your pay to performance program incentivises gaining new customers, you may be inadvertently de-incentivising customer service.
If you can identify outcomes that won’t negatively impact others, then pay to performance may work for you.
2. Performance Review Structure
Using a measured or individualised performance review, as discussed in this month’s download below, allows for more accurate measurement of employee’s performance and progress toward defined goals.
With this type of review in place, pay can be allocated based on specific performance.
3. Capable Management
A key component of a pay to performance plan is competent management and their ability to consistently deliver on the process.
To determine if your management is capable of managing a pay to performance program, consider the following questions:
- Do managers rush through or gloss over performance reviews with little attention, enthusiasm, and accuracy?
- Are there departments or divisions where all employees receive similar performance scores?
- Are your managers skilled and capable of having difficult conversations with low performers?
If your managers haven’t been trained to deliver structured performance reviews or aren’t sure how to have tough conversations with low performers, perhaps it’s best to wait on pay to performance.
You can train managers in these areas, making pay to performance possible, and also improving employee performance overall – no matter your compensation structure.
Perhaps one of the most overlooked elements of considering linking pay to performance is your company’s culture.
If employees are accustomed to measured progress, specific goals, and structured reviews, they’ll be more adaptable to a pay to performance plan.
If your culture is loose and subjective with little measurement, a pay to performance plan might be too much of a jump. Consider your day-to-day company culture. Do you see a pay to performance plan fitting that atmosphere?
Whether or not you decide to link pay to performance, you’ll want to ensure your performance management approach is driving your business forward.
For details about three types of effective performance reviews, download the ‘All Stars’ Performance Review Guide below.
Together, we can ensure your team is high-performing and reaching its full potential.
Download: ‘All Stars’ Performance Review Guide
Your short guide to building an employee performance review program that breeds excellence:
- Learn the 3 different levels of employee performance reviews commonly used by businesses today
- Evaluate your company’s in-house performance review capabilities
- Find out how to build a performance review program that turns your staff into All Stars!
If you have questions on this topic or any others, feel free to reach me by email or set up a free one-on-one consultation session, or drop me a comment below.
Thanks for sharing!