The idea of performance pay is a good one, right? Someone's compensation should be tied to the results he or she produces. Simple. So why the angst? Why do so many organizations struggle with linking pay to results? Why do so many conclude that the term is nothing more than an oxymoron?
I think those questions are best answered through a real life example. Several years ago a company approached our firm to help them build a better compensation strategy. Their compensation philosophy prior to working with us was to pay people at the 90th percentile of market standards. The premise was that if they paid people at the high end of the market, they would attract the best people--and having the best people would translate into improved results. Didn't happen. Let's examine why.
The success of the approach described rests on the assumption that if you pay people more than the competition, you'll get better results than the competition. In essence, this philosophy says: "We believe performance can be purchased." Well, there is no data to support the idea that you can just buy results--and that's not what true pay for performance implies.
Tying pay to performance has to do with how you pay people, not how much. It's about aligning compensation strategically to support the business model and strategy of the company. Performance pay means people understand their role and what's expected of them in part because of how they're paid. Their pay package helps them identify what success means in their stewardship and how it will be rewarded. Performance pay is a way to clearly identify the financial partnership you wish to have with an employee.
At the root of effectively linking pay with results is idenitying clear outcomes and who owns them. The collective outcomes a company pursues need to add up to increased shareholder value. This can only happen when a business has envisioned the future through some kind of forecasting process at various levels of performance--base (we have to do this), target (we're building our budget around this) and superior (if the right things come together, we'll do this). This kind quantified envisioning practice allows you to anticipate improvements in shareholder value. That value creation can then translate into methods of value sharing--annual bonus plans, equity participation, phantom stock arrangements, profit pools and so on. This is what I mean when I say it's not about "how much," it's about how you pay compensation.
The key, then, to transforming "performance pay" from an oxymoron to an effect practice lies in your organization's ability to more clearly identify the ends to which it is working. People want to understand the relationship between the vision of the company, its business model and strategy, their role in that construct and what's expected of them in the role and how they will be rewarded for meeting those expectations. That kind of "line of sight" creates greater focus. Focus improves execution which, when sustained, produces cycles of success. Those performance cycles, then, become feedback loops that are positively reinforced through the pay programs to which they're linked.
In short, no, "performance pay" needn't be an oxymoron.
To learn more about this idea, attend our upcoming webinar entitled: "Pay, Performance & Productivity." '
