New challenges in pay for performance

Workers who at one time would have been disciplined are now being rewarded because of tight labour markets
By Shannon Klie
|Canadian HR Reporter|Last Updated: 08/14/2007

Pay for performance has had its share of detractors. Common criticisms include that it can foster an individualistic culture or a culture of entitlement. But the hot labour market in the West is creating new problems for pay for performance, according to a managing partner at HR consulting firm Cenera.

In Alberta, the quality of work that would be have been deemed “poor” 10 years ago is now considered “adequate” because employers are desperate for staff, said Bruce Green.

“These people are still being rewarded in salary increases or performance incentives when 10 years ago they might even have been put on discipline,” he said.

Besides creating a culture where less than stellar performance is rewarded, this can cause problems for companies with locations across the country. An employee working in Alberta is less likely to move to another province if the performance expectations in that province are significantly higher, said Green. Also, employees in the other regions could feel jealous because their counterparts in Alberta are constantly being rewarded for meeting performance goals that are much lower than their own.

While different departments and business units can have different performance criteria or goals, these goals should be equitable across the organization, said Green.

“It comes down to making sure that you’ve got performance standards that are fair and equal from an independent eye,” he said.

Unfortunately, the old problems with pay for performance still exist. Plans that reward individual effort aren’t conducive to teamwork, said Richard Long, a professor of HR management at the University of Saskatchewan in Saskatoon.

“People tend to think only of themselves. They’re not too concerned about the performance of others. It’s counter-productive for them to spend a lot of time showing co-workers how to do things,” said Long, who is also the author of

Strategic Compensation in Canada


However, in the right conditions, and with the right plan, pay for performance is effective at increasing and improving performance, he said.

There are three criteria for the successful implementation of a pay-for-performance plan for individuals, he said. The individual’s performance must be distinguishable from others, there needs to be a scope for differences in performance and these differences need to be under the individual’s control.

For instance, an assembly-line situation where the individual has no control over how much work is done or how fast it can be done wouldn’t be a good environment to apply pay for performance.

In situations where there is a strong team effort, where it’s difficult to single out one person’s performance, rewarding one individual over another can cause problems within the group, said Long. In these instances, the organization should institute group pay for performance instead. In this way, the entire group is rewarded when it meets its targets and this fosters a co-operative working environment where individuals are willing to help each other out.

In some cases, companies are offering both individual and group-based pay for performance, said Long. Individuals who go above and beyond are recognized for their contributions, but the entire group is also rewarded when it meets certain targets.

“You can have the individual system for motivating individuals but then the group system for motivating co-operation,” he said.

Regardless of the type of plan — individual or group — the organization needs to clearly communicate what is expected of employees in order for them to receive the incentive.

“It should be clear right from the outset what the expectations of the role are,” said Green. “You communicate where you are to employees and how they can get extra incentives beyond that.”

Managers need to be aware of these expectations just as much as employees, otherwise the incentives could be assigned on a more subjective basis, which could lead to allegations of favouritism and decreased morale, he said.

The incentive pay, be it a salary increase or a bonus, should also be variable to be effective, said Green. If an employee always gets a $4,000 bonus in June, regardless of what she does on the job, the bonus becomes a form of deferred compensation, not a performance incentive, he said.

While incentives can take the form of salary increases or bonuses, some companies are offering other incentives, such as more benefits or additional pension contributions. However, the younger generation wants to be given the chance to choose how this money is spent, said Green. They want to take advantage of the benefits or incentives that are more meaningful to them and these take the form of short-term incentives such as a spa gift certificate rather than optical benefits, said Green.

There is, however, at least one company that is tying its corporate performance to increased pension contributions, according to Nick Bishop, practice leader with the Wynford Group, a Calgary-based management consulting firm.

The company wanted to increase its pensions offering without getting locked into a financial commitment it might not be able to meet in leaner times, said Bishop.

“It was our solution for their issue,” he said. “The wanted to do more in pensions and employee share programs, so they left it to us to find how can they do more without putting all their costs up on a fixed basis.”

The company will offer its basic level of matching for retirement savings plans and employee share ownership plans, but it will increase the amount it matches if the company reaches its profitability targets.

While the Wynford Group hasn’t developed this plan for any other clients, “the principle can really apply to anybody,” said Bishop.

While pay for performance can improve output, there are certain instances when it’s just not worth the effort and cost, said Long.

In command-and-control organizations, where individuals or groups don’t have control over their output, organizations should consider other methods to motivate behaviour. In call centres, managers can monitor how many calls employees take in a certain time frame and how much work is being logged on the computer.

“It might just be easier to control behaviour with managerial surveillance or computer monitoring,” said Long.

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