Is Pay for Performance Dead?

It wasn’t too long ago that “pay for performance” was a fundamental component of many organizations’ approach to compensation.  They were committed to the idea that their long-term success was dependent on rewarding and retaining their best performers, and identifying and assisting those whose performance was not as strong.

In my view, this sentiment has changed quite a bit over the last five years.  I see a lot of organizations that either have consciously moved away from pay for performance, or continue to advocate it in an abstract sense but whose actual policies show very little similarity with a true pay for performance approach.

If I am correct, why has this occurred?  I believe there are two fundamental reasons:

1.  There simply isn’t enough money to make a true pay for performance approach work.  With the economic downturn that began in 2008, salary increases have either been frozen for a period of time, or been tied to budgets in the 2-3% range on an annual basis.  With that level of budget, it is very difficult to make the kinds of monetary differentials necessary to distinguish superior from average performance.

2.  Managers in many organizations seem to lack either the skill or the stomach to make the hard decisions involved in evaluating performance.  It is much easier to rate everyone the same then it is to elevate some people’s performance grade while reducing others.  Many managers feel uncomfortable making distinctions of this nature, because those rated lower will be disappointed and will raise questions and/or complaints.

I do not see either of these issues changing dramatically in the near future.  I think both will continue to be challenges for implementing a true pay for performance approach.  If that is the case, then companies will have to find other ways to ensure their best performers are motivated.

One way to do this is to ensure that these individuals are recognized, even if such recognition does not carry with it significant monetary reward.  This can be done by small “spot awards” for excellent performance, praise from their manager, new and interesting work assignments, and other similar actions.  It is important that the best performer understands the company appreciates his/her efforts.

The other important factor is professional development.  In my experience, employees will tolerate a lot of things—small salary increases being one—if they feel they are growing professionally and learning new things.  The best performers must be challenged by new work assignments that stretch them professionally.

What’s your take?  Is pay for performance dead?  And if so, what other actions can companies take to motivate and retain their best performers?

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