Why does Pay for Performance fail?

Why does Pay for Performance fail?

Pay for performance appears to be the most intuitive method of compensation which should drive behavior towards better performance and therefore rare is the organization which says that it does not believe in the concept. As intuitive as it may sound, rarely it delivers the outcome that should be most obvious. The success of any pay-for-performance compensation design depends on two levels and both are high inter-related: one at a psychological level on how they are perceived by the target population and second at the structural level on how they are actually designed. As mentioned, they are so intrinsically related at both levels that rarely would it be possible to do one of them well without succeeding in the other. At a very fundamental level, we often end up designing pay-for-performance schemes basis (a) wishful thinking on what the target population should aspire for, and (b) fool-proof design which often end up making it so complicated that loses the very purpose for which it was designed.

First, let me clarify what I would include in pay-for-performance compensation design. I refer to any kind of monetary incentives which may be payable on a monthly or quarterly basis; it would include any kind of monetary bonuses which are usually paid on an annual basis; it would also include any Stock Options or Restricted Stock Units (RSUs) which are given basis performance of employees.

At a psychological level, any pay-for- performance scheme must satisfy the following three conditions:

  1. It should be something which the target population really aspires for. Pay-for-performance should always understand what truly motivates the target population for which the organization is designing the scheme for. For example, if the incentive is in the form of Stock Options or RSUs which typically have a vesting period of a few years and the target population is really looking at a monthly cash-in-hand incentive, they are unlikely to find a pay-for-performance scheme which is based on RSUs/ Stock options very aspiring. What the target population really aspires for may often differ from what the top management may want them to aspire for. There is nothing wrong if the top management believes that every employee must be interested in the long term growth & profitability of the organization and hence by giving employees Stock options or RSUs everyone should be more focused on long term rather than the immediate performance. However, if the target population is actually interested in monthly take –home salary, then this is not going work as a pay-for-performance scheme for sure, whatever else it may work for.

2. It should be something which the target population feels reasonably confident of achieving: If the pay-for- performance scheme is designed in a manner such that the target population feels that it is almost impossible to achieve the reward, it is very unlikely that it is going drive too much of performance. If the performance bar is set so high that rare would be the employee who would achieve it, then the purpose is defeated. In no way it is being suggested that each and everyone in the target population should get the monetary reward because even in that case it is unlikely that there would be any improvement in performance which would result from such scheme. While I do not have a specific number, but there should be a very decent probability of the individuals in the target population to achieve the monetary incentive without it becoming so common place that everyone ends up receiving it. That fine balance is easier said than done, and more often than not, we swing one way or the other.

3. It should be perceived to be something which can be directly influenced by the target population: If the target population sees the parameters on which the pay-for-performance scheme is designed is beyond their sphere of influence, it is unlikely to drive them towards higher performance only because of that. Classic example is where such schemes are linked to an over-arching goal for the organization like company-wide profits where the target population is involved in front line sales in their territories. No one is disputing the significance of the over-arching goals for the organization per se, but the moot question is would that be perceived as within the sphere of influence by the target population. In our endeavor to drive home the message of the over-arching goals for the organization, we sometimes end up creating pay-for-performance schemes which are not perceived within the sphere of influence of the target population.

As mentioned, the design elements are intrinsically linked to the psychological elements mentioned above. From a design stand-point, the following points need to be satisfied:

A. It should be easily understandable: As simple as it may sound, there are numerous examples where we end up designing pay-for=performance schemes which are so very difficult to decipher that it does not take too long for the target population to lose interest in them. Imagine you are playing cricket, soccer or badminton but you do not understand how one scores runs, goals or points in the game. The rules are so convoluted and complicated that the players in the game find it hard to understand how they can win the game! Chances are that the players would not find any interest in the game to begin with.

B. It should be visible on a real time basis: If the individual progress on the pay- for-performance is visible much after the period of performance, it is unlikely to drive the target population to the desired level of performance. In the example of cricket/ soccer/ badminton, imagine if the players did not know how they were performing while the game was in progress! Real time is linked to the period of the pay-for-performance scheme- if it is a monthly scheme, then real time would surely mean that the target population is aware of how they are faring at least on a weekly basis if not daily. Similarly, if the pay- for –performance scheme is an annual one, the target population should be aware on a monthly or quarterly basis on how they are faring.

C. It should be available immediately at the end of the performance period: For any pay-for-performance scheme to drive performance, the reward should be available immediately at the end of the performance period. Sometime the pay-for-performance schemes are designed in such a manner that the payment can actually happen with a considerable time lag post the performance period. Again taking the sports analogy, imagine if the medal ceremony for Olympics were held three months after the Olympics is over because it takes that long to decide which player has won the gold and which one has won the silver or bronze medals!

All the above points, whether on the psychological front or on the design front are very intuitive, but we more often than not fail in few of them That invariably leads to a failure of the pay-for-performance schemes altogether.

D U Krishna Rao Dhumal Rao

Retired Executive at Bharat Electronics Limited

8 年

Performance to be assessed based on roles, responsibilities, activities and accountability for the outcomes matrix. Performance credit points to be generated automatically by the Outcome Matrix formula. The formula refines periodically with the data updates. The accumulated credit points can be encashed at any time. But the value of credit points refines periodically with overall performance of the organisation matrix. By this the employee has drive to perform better in person based activities and hopes for better performance of the organisation aswell.

回复
Sanjeev Kumar

Associate Vice President at M/s Mylan Laboratories Limited, Indore

8 年

Nicely captured. On a psychological front, perception that it is been implemented fairly holds the key. A small mistrust will have huge negative impact.

回复
Shailesh Goyal

HR Practitioner and Learner | CHRO | HR Head | 20 Years of Experience across Consulting, Digital, IT, Telecom, Media, and Manufacturing

8 年

A 4th element in the psychological aspect can be added, which is that the employees believe that the management is out there to "actually pay out the rewards if deserved", and not withhold them. Basis my experience with sales incentive schemes, numbers can be represented either ways. It could be seen as 29.6 or 30 (rounded off). When seen as 30 it prevents the leader from having achieved the benchmark of less than 30 (in case of a negative metric - days of sales outstanding). If employees feel that the management is open to at least looking at genuine discrepancies and out there to "actually pay", such schemes get a booster.

Shailesh Goyal

HR Practitioner and Learner | CHRO | HR Head | 20 Years of Experience across Consulting, Digital, IT, Telecom, Media, and Manufacturing

8 年

Great points Kinjal

回复

要查看或添加评论,请登录

社区洞察

其他会员也浏览了