Picket fence

Another Reason why Pay for Performance Doesn't Pay

Daniel Pink's book, Drive, summarized some of the research on how people are motivated  and how they are not, with money being a huge de-motivator. Even though this book was a huge popular success, very few companies have eliminated their incentive compensation systems as a result. As someone who once helped put this type of goal-based compensation in place, I can offer another reason why companies should eliminate this practice.

The reason this compensation scheme was first implemented was to motivate employees to focus on the strategic objectives by rewarding their achievement. However, it has the opposite effect in practice. This compensation system takes time and effort away from achieving the corporate objectives. I've been involved in implementing a pay for performance compensation system twice now - once as a consultant and once as an effected manager.  What seems simple enough at first begins to take on an effort of Herculean proportions, especially because any effort regarding compensation needs to be fair and objective. Typically, the first step in implementing such a system is to determine what the bonus, options, stock grant and salary percentages are by job level. Easy? That's assuming that the company has standard job levels across all functions. If the company has grown as the result of mergers or acquisitions, then consistent job levels are unlikely. So this step involves implementing standard job levels across the company -a  huge undertaking, which, by the way, is not part of the corporate objectives. So let's just assume that job levels are consistent and determining the right combination of rewards per job is fairly easy.
You implement a paper-based system, and then you learn a few things:
1. Not all goals are created equal. Some people have a knack for writing easily achievable goals. Others can't be quantified or measured for achievement.
2. Performance is very subjective. What one person judges as a "meets expectations," another person judges as "exceeds."
3. Developing goals at the beginning of the year to be rated on at the end does not allow enough flexibility to respond to changing business conditions.
4. Waiting until the end of the year to review goals does not give anyone the opportunity to course-correct if goals are not being met.
5. There is a tremendous amount of paperwork involved that is hard to keep track of and hard to track for fairness and objectivity.

Most companies realize that they need some type of information system to help. Now in order to address the deficiencies above, new initiatives are required:
Massive training and communications on how to write SMART goals
Manager training on how to fairly rate performance objectives
Business processes to ensure fair calibration, like cross-functional calibration meetings
HR command and control functions to ensure fairness of goals and ratings and accuracy of information
Periodic reviews to update goals and course-correct and documentation regarding these periodic reviews
New information systems that require infrastructure, development, maintenance, user training, and user support staff

So what is the ultimate result? An organization that spends a significant amount of time writing goals, reviewing goals, revising goals, ensuring SMART compliance, approving revised goals, summarizing performance-to-date, reviewing performance with managers, attending calibration sessions, which result in another revision of goals and ratings, and approving periodic reviews in an information system. (See my humorous take on this here.) Oh, and updating and maintaining a performance review system and of course,  learning how to use the information system and how to comply with all the processes involved. Now managers spend less face time with their directs so that they can complete all the requisite paperwork. Eventually, managers will object to having more than just a handful of reports so new layers of supervisors will arise so that no one is overburdened with too many performance reviews. Which all leads me to ask, "What was the point of the pay-for-performance system in the first place?" Oh, yeah, it was to focus everyone on the corporate goals.
In Human Resources, HR policies, Incentive compensation, Pay for Performance, Daniel Pink, Drive
By Karen Phelan
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