Pay-for-performance is certainly no silver bullet. Like any management system, opinions about pay-for-performance differ.
Those who endorse pay-for-performance may tell you it is an effective method for attracting and retaining the right people and for nurturing an environment of continuous improvement. Those who generally dislike pay-for-performance systems may tell you such a system encourages individuals to focus on personal gain or their own goals at the expense of others, thus destroying trust and teamwork.
On paper, it may appear that a pay-for-performance system is a perfect solution for:
Attracting and retaining the best and brightest;
Motivating people to work more efficiently;
Obtaining the firm's strategic goals and objectives;
Recognizing a variety of employee contributions; and,
Encouraging people to help others achieve their goals and objectives.
We have also found, however, that there are many pitfalls in implementing a pay-for-performance system. Some of these pitfalls are related to the design and implementation of the plan itself, while others are the result of cultural or operational dysfunctions of the implementing firm. Pitfalls that we have observed over the past several years include:
The plan is too complex. It includes too many measurement criteria, hard-to-understand measures, or difficult formulae for calculating pay-for-performance payouts.
The plan rewards behaviors that bring about unintended consequences. For example, the plan may reward someone for hitting a minimum number of charge hours without evaluating the profitability of the work that was accomplished. In other words, billable hours may go up while profitability goes down.
Administrators of the plan are unable to obtain the data needed to track the measures, or individuals affected by the plan do not trust the sources of the data and/or the keepers of the data. Since the plan often includes a measure tied to behaviors, it may be difficult to "audit" whether the behaviors are actually occurring. Observation or self-tracking may be the only options to do so.
Employees may focus on individual goals to the detriment of others, the team, or the firm. This requires a close look at whether the system can be manipulated, whether the plan includes criteria with unintended consequences, and whether the plan includes both independent and interdependent criteria.
The firm is unwilling to commit to the training that is necessary for individuals to develop the needed competencies as outlined in the plan. Too often, firms have job descriptions that include needed competencies (some may have even developed detailed competency maps) but fail to assist employees in developing an individual development plan that outlines how, when and where they'll learn these competencies.
The firm gives only lip service to its core values, or owners (or others who evaluate performance) have differing views on what it looks like when someone is or is not living them. This requires the firm to not only identify its values, but to define them and to identify the specific behaviors in which people would be engaging if they were, in fact, living them.
If your firm decides to go down the pay-for-performance road, you must be willing to accept major changes. Gone are the days of subjectivity, favoritism and entitlement.
Pay-for-performance systems require that there be timely and effective evaluations of performance. This will require more preparation on the part of the evaluator and more honesty in the evaluations, since employees (and partners) are being evaluated against clearly defined goals.
Ultimate success in a pay-for-performance system depends on improving the skill sets of the people. This is a long-term and firm-wide commitment to training. If the firm does not believe that training is the foundation for its success or is unwilling to make this commitment, the pay-for-performance system will not succeed.
Finally, a firm needs to embrace a culture of open and frequent communication. Firm goals, department goals and individual goals must align, and must be communicated frequently and clearly.
The net effect of a good pay-for-performance compensation system should be the same for employees as it is for owners. You should expect the following benefits from a well-designed system:
Compensation increases and total compensation are based on overall contribution to the success of the firm, rather than one or two measures of success.
The system creates a results-driven, performance culture, rather than a culture of entitlement.
Employees and owners know with clarity their job descriptions at each level; career progression opportunities within the firm; compensation upside; personal goals that they help to create; and performance reviews.
Underperformers often choose to leave the firm on their own, and even when they don't, it is far easier to make a tough decision because it is based on objective information.
All of this leads to greater personal accountability, which in turn should lead to higher levels of productivity, efficiencies and profitability.
Sustained success in any organization or team more often comes about as the result of above-average individuals who work well with and support one another than from superstars who work well independently.
Most successes are group efforts. Nuclear weapons, airplanes, and spacecraft that can take a man to the moon and back were not the results of efforts by the one, but of the many. There may have been heroic efforts and great individual performances, and we suspect they were rewarded appropriately. And when we can help individuals understand that their contribution to the team and to the firm can be measured and rewarded appropriately, and that it can grow the amount available for such rewards, we're much more likely to see "All for one and one for all" behaviors.
August Aquila is a well-known author, keynote speaker and management consultant. Reach him at firstname.lastname@example.org. Coral Rice is a senior consultant with FranklinCovey. Reach her at email@example.com.
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