There's been much web-based discussion of late about pay for performance and incentives (the Dan Pink video controversy and recent WorldatWork community debates to name just a few). These debates have prompted a number of HR and reward professionals to question whether performance based rewards really work or whether, perhaps, they should be relegated to the dustbin in favor of a more enlightened worldview.
My position is essentially this: If you think the link between performance and rewards is going to go away any time soon, especially as we move into the new post-recession reality, you'd better think again. One of the (many) reasons why is that business operations overall, particularly customer-supplier relationships, appear to be trending strongly in that direction.
An article Pay for What You Get: Putting Performance-Based Contracting to the Test in this week's issue of Knowledge@ Wharton discusses recent "breakthrough" evidence, reported by researchers at Yale University's School of Management, of the power of performance-based contracting.
A little background from the article:
PBC -- also known as performance-based logistics (PBL) or power by the hour (PBH) in some circles -- isn't new, though its use has been limited. Often associated with maintenance agreements at aerospace and defense companies, it was first embraced by the likes of U.K.-based aircraft engine manufacturer Rolls-Royce some 30 years ago.
But under pressure to cut costs and improve efficiency, others have hopped on the bandwagon more recently. A case in point: the United States Defense Department, which has required widespread adoption of PBC for new military equipment since 2004. More companies should follow suit. The reason? According to its proponents, PBC is the most economical way to cover the maintenance costs of big-ticket items like F-22 fighter jets and commercial airplanes. They add that PBC increases the reliability of these items by decreasing the number of major repairs they need.
There's other good news for cost-conscious companies. With PBC, it's easier to keep a lid on overall capital expenditure.
(More about the topic and this trend can also be learned from an earlier Wharton article Power by the Hour: Can Paying Only for Performance Redefine How Products are Sold and Serviced)
At its essence, this trend represents an effort to align incentives between suppliers and their customers. Based on the results of their study, Yale researcher and professor Morris A. Cohen predicts that PBC could dramatically change how customers and suppliers work together. Which could mean a dramatic change coming down the pipe for organizations that provide products and services to other businesses, ultimately raising the bar for how they measure, manage and reward performance. And, by logical extension, for how they measure, manage and reward the efforts of their workers.
One of the most popular justifications raised for abandoning pay for performance is that we do such a lousy job of it. I can't argue that there isn't an element of truth there; we certainly have lots of room for improvement. Lots. But that doesn't mean it isn't right and necessary. Given the current economic climate and the likelihood that our organizations will, indeed, be asked to link their income to performance, we have a clear imperative to take the steps necessary to do better.
That's what I think. You?