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Making Pay for Performance an Organizational Differentiator (Again)

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Greg Belkin
on January 08, 2013

“Pay for performance” is an industry phrase we hear a lot these days. Pay your employees for their hard work. And, believe it or not, most organizations are already doing this. According to a 2011 study by the Institute for Corporate Productivity (i4cp), a research and advisory organization, 90% of organizations have already established pay for performance cultures. To simply have a pay for performance plan is no longer an organizational differentiator.

Given this reality, however, there are still ways to make pay for performance plans stand out among your competition. Many companies have embraced pay for performance plans but have not made clear the plan’s focus. Are compensation and performance plans designed with the company in mind – designed to improve the company’s bottom line, overall productivity and achievement of corporate objectives? Or, are they designed to better the employee – to recognize and reward high performers and decrease turnover? According to the same i4CP study referenced above, “The existence of a pay-for-performance strategy alone is not a differentiator between high- and low-performing organizations—most organizations, regardless of market performance, reported that they are using some sort of pay-for-performance strategy. Rather, it is the approach taken in executing this strategy that separates the high-performance organizations from the rest of the pack.”

So what approach should organizations take to ensure their pay for performance strategy is truly a differentiator?  According to a September 2011 article titled “Pay for Performance Pays Off” by the Society of Human Resource Professionals (SHRM), high performing organizations are differentiating themselves by putting the focus of their pay for performance plans on benefitting the employee. Nearly 47% of these high performing organizations identified a focus on “recognizing and rewarding high performers.” Conversely, the most popular category of focus for lower performing organizations was “increase the likelihood of achieving corporate goals” (32.5%). This is not to say that achievement of corporate goals is not important. However, these results suggest that the broader goal of a pay for performance plan should be to motivate and reward people, and let achievement of corporate goals be a natural result of a happy workforce. An employee pay for performance plan is one that engages the employee for feedback, measures their compensation plans against peers in their industry, and ensures that goals and objectives are made clear to all relevant parties.

Here are some more interesting data nuggets that add gristle to the fire. According to May 2012 SHRM article titled “Reward Strategies Should Target Key Talent”, the top three reasons talent leaves their organization are 1) opportunity to earn more elsewhere (cited by 77 percent of respondents), 2) lack of promotion opportunities (67 percent) and 3) pay levels perceived as unfair vs. outside opportunities (58 percent). Net-net: politics is perception. Employees need to feel like they, individually, are getting paid fairly, and thus require a plan designed to cater to their individual, specific needs. Not the company’s. Nowhere on this list was a mention of leaving because the company was not achieving its corporate goals. 

Achieving corporate goals and increasing productivity are crucial. Few would argue this point. When it comes to pay for performance plans, however, this needs to be a secondary focus. The priority must be to engage your employees on an individual basis to encourage retention. Achievement of corporate goals will happen naturally if the employee base is happy, motivated, and feeling like they are appreciated. That is the true way to make pay for performance a corporate differentiator once again.

[For more insight into this pay for performance topic, view the recent webcast “Building the Foundation of the Pay-for-Performance Enterprise”, available for access here.]

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