Walking the line in incentive programs (Web sight)

Some can motivate, others lead to poor performance and low morale

Pay-for-performance or merit-based compensation has its share of critics and fans. The system was developed as a way to motivate employees with financial incentives, thereby increasing an organization’s performance levels and profits. For some organizations, it works well — money can be a very strong motivator. But other employers have given up on pay-for-performance plans, because they’re hard to implement and it’s difficult to determine which employees are deserving of rewards. The following websites look at both sides of the pay-for-performance debate.

Don’t bother with small increases


This Globe and Mail article “The suite science of pay” says “Rewarding performance can be either a huge motivator or a highly divisive distraction. Structure it right and your staff will be striving for profits, get it wrong, however, and those gains could be gone for good.” A lot of companies use pay-for-performance strategies, says the author, “with about 20 per cent of Canadian companies offering profit sharing programs.” Toronto management consultant David Tyson, who focuses on compensation issues, says not all companies are doing it right. He warns organizations against getting involved in a system of pay-for-performance that’s complicated by policies, forms and complicated formulas. “You go through enormous rituals to rate everyone and then the increases are so small you don’t even get your staff’s attention. Why bother?”

Programs accommodate poor performance


David Maister, an expert on managing professional services firms, sets out his reasons against pay-for-performance compensation systems in this blog entry. Maister argues the main disadvantage is that “they provide a wonderful excuse not to manage.” He insists that in a fixed-salary system the employer is forced to manage since underperformance can’t be tolerated. In paying for performance, an employer actually gets less performance because the system accommodates underperformance. Another problem, says Maister, is that in a performance-based system, “by definition you will have no institutional loyalty… the individual pay system is designed to minimize firm cohesion and thereby create the sort of ‘jumping ship’ syndrome that we have seen in every profession.”

Weighing pros and cons


“Pros and Cons of Pay for Performance,” from the HR Café site, asks “Are incentive programs good for the company or bad for morale? It depends on whether the rewards help support corporate goals, such as increased profit and customer loyalty, or if they merely engender unhealthy competitiveness and back-stabbing among employees.” Kathy Charlton, manager of workplace vitality at Texas Instruments in Dallas, says, “Our people work hard and long hours. Rewards make a difference in their attitudes and performance. Hey, everyone has a need to be recognized, and not just once a year when there’s a formal review process. And when recognition is tied to effort, you end up getting more bang for your buck.” But Alfie Kohn, author of Punished by Rewards, insists rewards programs don’t work. “One of the most thoroughly replicated findings in social psychology,” he points out, “is that the more you reward people for doing something, the more they tend to lose interest in whatever they did to get the reward.”

Corporate culture can determine success


The article “Pay-for-performance doesn’t always pay off” reviews Harvard University professor Michael Beer’s study of pay for performance at Hewlett-Packard. In his examination of 13 pay-for-performance programs at HP, Beer found “connecting pay to performance may be far trickier than it at first appears.” The article states that while 13 separate units within the company launched pay-for-performance programs in the early 1990s, they were all terminated within three years. Beer admits HP’s own culture of commitment could have led to the failure, while “similar programs at low-commitment companies might have succeeded where HP failed.”

Ann Macaulay is a freelance editor and regular contributor to Canadian HR Reporter. Her Web Sight column appears regularly in the CloseUp section.

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