The Problem with Most Pay-for-Performance Programs

October 1, 2018 in HR Best Practices


Is It Really Pay-For-Performance?

Today, nearly every organization claims to have a pay-for-performance program. But when companies give merit increases to over 95 percent of their employees (in other words, to all employees except those who are about to be fired) are they actually paying their employees based on job performance? Are those raises really “merit” increases?

Cost of Living Adjustment in Disguise?

The answer to both of those questions is a resounding “No!” Here’s a more accurate description of a true merit increase: when an organization has a limited amount of merit increase monies available, it first rewards its best performers properly for their contributions, then distributes remaining funds to other employees in decreasing amounts, based on the degree of each person’s individual contribution. Under this arrangement, some employees who are performing at a level described as “adequate” (or “sufficient” or whatever term the organization uses for average work) should not receive merit increases.

There simply isn’t enough money for everybody, so the ones who deserve it the most should be the ones who actually get it. Some of those average employees will get mad and maybe even quit— but such losses are acceptable if they enable a company to reward and motivate those who make the greatest individual contributions to its well-being and success.

All In Love and Work Sometimes Isn’t Fair

Advocates of the status quo who believe that everyone deserves to get an annual raise will say, “You can’t do that! How unfair!” But those who champion rewarding the average among their employees need to look past the emotional rhetoric to consider what they should be paying for. Unlike groceries, movie tickets, or shoes, a reward for job performance is not a commodity with a fixed value. Rather, its value varies: it’s greater for those who provide higher levels of performance and less (or even nonexistent) for those who provide lower levels of performance. Companies don’t have endless amounts of money to pass around, so they should first take care of those who make the greatest contributions.

Most organization won’t like this proposal. Many business leaders and even some compensation practitioners believe in the unwritten social contract that holds that employees who perform well enough to keep their jobs should get something for their efforts at the end of a performance measurement period. But what happens when there isn’t enough reward money to retain a superstar employee? What happens when the difference in reward levels is so narrow that top performers start to think “Why bother putting in the extra effort?” There’s always a recruiter out there who will call them and say, “Come to work for us. We respect you as a high performer, and we’ll take care of you.”

Organizations need to make sure that their pay-for-performance programs don’t focus too much on rewarding their average employees. If companies don’t take care of their superstars first (and not as an afterthought with whatever money happens to be left after other rewards are paid out) they may end up pushing those top performers away—and toward the competition.

Does This Describe Your Current Pay Increase History?

If you answered ‘yes’, work with the experts at Kinsa Group. We’ll scope out compensation and benefit expectations as well as assist with offer negotiation so you will receive the compensation that’s fair – and you deserve!

Editorial Note: Portions of this blog originally appeared in the September, 2018 edition of ABR Employment Services magazine, ABR HR Insights. It has been edited and was originally written by Chuck Csizmar, founder and principal of CMC Compensation Group.