Mo Money, Mo Problems - Pay for Performance is Tricky....

You know the drill on pay-for-performance (PFP).  You do your best to ingrain the PFP fundamentals into your culture, but here's the trick - to truly pay your best performers, you have to be tough on the folks who aren't cutting it.  Is your budgeted percentage for merit increases across your company/unit 3-4%? 

For most of us, 3-4% is the standard budgeted range.  And that's where the rub is.  To give your best performers 6-8% and make them feel like the special people they are, you have to take it away from a low performer.  Most of your managers aren't prepared to sit down with the lowest performing person in their groups and tell them they are getting a 1% raise - or no raise at all....

To them, it feels so....so.....Jack Welch!  (Note to file - I think the picture used to the right featuring B.I.G. is about to become my new logo for all compensation posts.  I think Ann Bares should adopt it as well...)

Suzanne Rumsey over at the Consultant's Corner at Knowledge Infusion wonders aloud if Pay-for-Performance isn't the wrong way to look at the opportunity:

"Lately, I've been working with several clients who are grappling with the concept of Pay for Contribution, rather than Pay for Performance. Much of this transformation in thinking is coming about as more and more organizations ask the questions, "What do we pay our employees for, really?" Pay for Performance tends to be a historical view, paying employees for what they have accomplished in the past. It is based on the premise that the employee, with his or her manager, has set SMART goals for the performance period, and has been evaluated against how well he or she achieved the goals identified.

Pay for Contribution, on the other hand, can be backwards or forwards looking, however, it is based more on the premise that the employee has contributed value to the organization is (sic) some form or other - whether by growing critical relationships, developing valuable intellectual property, implementing key infrastructure, etc. Often, Pay for Contribution is intended to reward more "intangibles" - elements that add value to the organization, but are difficult to quantify or establish objectives for up front."

Those are great thoughts.  The reality, in most of the companies that I've worked for and with, is that while the pay for performance model is institutionalized, the pay for contribution (or even potential) is more informal in nature. Like style, you know it when you see it, and the valuing process (how much do you compensate for that?) is more art than science as well.

For most progressive HR types, pay for contribution/potential falls under the term "equity increase". Special skills, innovation, etc. get valued on the top line after pay for performance is done, and you provide an additional increase for the noted contributions or innovation that make the person special to the org.

How special do those thoughts/contributions have to be?  Pretty special, because the pay for contribution/potential/innovation model that Suzanne talks about is UNBUDGETED in most companies. 

So, the contributions have to be special enough to warrant that call to action, and to make everyone feel like there's a retention risk if it doesn't get done. 

What percentage of your workforce falls into that category?  10%?  5%?

Comments

[Michael Haberman, SPHR]

Contribution = Value to the organization?
Are we asking the question how valuable is this person to the organization? What is the downside to the organization if we lose this person versus another, even if both are meeting their goals. By you achieving your goals are you better to keep than I am with me reaching my goals?

Many managers have an inherent feel for who is most valuable to their group. Whether or not they can compensate on that depends on the parameters set up and the perception of "fairness."

A sticky wicket that few are willing to tackle.

[Joanne Bintliff-Ritchie]

I don't see how this addresses the endemic problem spelled out in the early part of the post. If managers are unable / unwilling (that would be too lengthy of a debate) to differentiate based on performance they will have the same problem with contribution or potential or any other factor that requires differentiation. Selecting and developing managers based on the need for backbone must be the first goal. Once you have that you can work with any performance/comp "flavor of the month" approach.

[KD]

Michael -

Agree that when you attempt to treat people fairly, you'll rarely be willing to touch this. I suspect that's why you are an advocate for doing what's necessary to keep the best talent.

Joanne - Here's the crazy thing, by failing to address the pay for performance issues, the managers who use pay for contribution have created a new merit system. One that gives average performers the base amount (because the manager couldn't bear to tell them how they really felt), and stars more.

The crazy thing? When this is adapted, usally informally, stars make out much better than they do in a hard core pay for performance system based on a fixed budget. Inflation for stars occurs when orgs can't distinguish between stars and average perfomers under traditional merit systems....

[Paul Glover]

This isn't a compensation issue. It's a managemnent training issue. To allow managers the luxury of keeping low performers ("The Others" - those that should have been fired yesterday) defeats the organization's overall purpose of Continuous Operational Performance Improvement required for survival in the WorkQuake(c) of the Knowledge Economy.
It would be interesting to see if those managers still considered it difficult to deal with poor performers if their own compensation was determined by the performance of those same low performers.

[Melissa Edwards]

Paul - I disagree with the point that managers who enjoy 'the luxury of keeping low performers' is a management training issue. Training is teaching someone to do something well that they don't already know how to do. Many of these managers technically know how to deal with poor performers: they've been to all the training seminars, read the books and bought the t'shirt. Knowing how to do something and actually applying that knowledge are two very different things. Its an organizational culture issue (which, like environment of continuous improvement, we are all responsible for creating!).

[KD]

Melissa -

Agree with you. Most of the folks who won't confront the issue know what to do. It feels like confrontation, so they elect not to address the issue........