Words matter and sometimes their overuse dilutes their meaning and power. "Pay for performance" falls in this category. It has become a cliche, a catch phrase. Companies claim to believe in the concept but their pay practices don't evidence that conviction. Some assume that if they have a bonus plan, they are practicing "pay for performance." Well, it's a start, but only that.
Instead of talking about how the phrase seems to be used these days, let's talk instead about what it should mean.
A company that practices a "pay for performance" philosophy should be doing the following:
- Adhering to a compensation philosophy statement that clearly articulates how the company defines value-creation and its belief about value-sharing.
- Engineering and implementing short and long-term value-sharing plans, not incentives. The latter implies pay for behavior, not performance. Companies should be sharing value out of productivity profit.
- Defining clear outcomes for which employees have stewardship and building value-sharing metrics that reinforce roles and expectations; then tying value-sharing payouts to the achievement of those outcomes.
- Measuring the Return on Total Compensation Investment (ROTRI) and monitoring its progress over time.
- Reinforcing line of sight by effectively communicating the relationship between shareholder vision, the company's business model and strategy, roles and expectations and rewards.
- Promoting a wealth muliplier philosophy; one that communicates from ownership to the workforce that all have a vested interest in the wealth multiple that growth represents.
Companies that are committed to the strategic approach to compensation those six activities imply are actually trying to connect pay with performance in a meaningful way. They're not using the phrase as a fancy motto or a faux attempt to make it appearas if their compensation approach is based on meaningful outcome, results and wealth multiplier factors. Instead, they are committed to building a unified financial vision for growing the business.