The Performance Connection: Organization Performance & Employee Pay

Is there a connection between organizational performance and efforts to link employee pay to their performance?  New research from i4cp provides strong evidence that the answer is yes.

As part of its new research on performance management and highlighted in its recently released first in a series of Performance Management Playbooks (and bravo I say to them for tackling this tough topic head on), i4cp has some interesting findings on pay for performance to report.

Note first of all that, as part of its two performance management studies (July 2010 - 849 respondents, November 2010 - 325 respondents), i4cp separated all participating organizations into three "market performance" groups.  Placement of the organizations in the groups - "lower", "mid-range" and "higher" - was based on their self-reported ratings about company performance in the areas of revenue growth, market share, profitability and customer satisfaction.

Now, take a look at the difference between how the "lower" and the "higher" performing organizations responded to a series of questions about their pay for performance practices.

  
As you can see, higher performing companies are significantly more likely to tie pay to performance than their lower performing counterparts.

Direct cause and effect?  Perhaps not.  But, sheer coincidence?  I think it not likely.

Your take?

Comments

[E James (Jim) Brennan]

To the extent (not "extend", of course) that the study had sufficient observations for solid reliability statistics, it is excellent positive news for those that feel that reinforcing performance with overt rewards can be an effective tactic. While many P4P programs are poorly designed and badly applied pale imitations of good process done right, it is encouraging to see that when top management places a high strategic priority on performance output results, the clearly delivered tactical message can drive better outcomes.

Not really a surprise, but helpful substantiation of a reality denied by those who would generalize a universal condemnation from narrow exceptions to standard good practice. The simple fact that anything good can be done badly does not invalidate the good. Bad process will usualy taint the outcome results. Poor processes usually produce bad results, even if the intent is good and the objective is desirable. Likewise, good process enhances the probablilty of positive desirable outcome results. We need to master both.

[Dan Walter]

I wonder how many of the companies who are paying for performance are letting the tail wag the dog. I have found multiple cases where companies avoid utilizing pay for performance BECAUSE they are not performing well. They realize that they cannot pay well for performance and do not have a truly viable plan to perform better. It may be a case of performance's capability to drive compensation design, rather compensation's ability to drive performance.

[Ann Bares]

Jim:

Thanks for the observations and thoughts. Like you, I get frustrated when people draw large inferences from limited examples of bad practices and processes.

Dan:

That is a really interesting observation and question - certainly a possibility worth considering. Thanks for sharing!

[working girl]

Perhaps it's part and parcel with trying to treat employees fairly. People who believe their efforts will be recognized are more motivated to perform, which in turn leads to better performance overall.

[Ann Bares]

WG:

Sure makes sense to me, because I think trying to treat employees fairly means recognizing (and rewarding) their efforts.

Thanks for the comment!

[Siggi]

Paying for performance or reducing pay for bad performance are two sides of the same coin.
Paying for performance can be very good, but you have to measure the performance fairly. My employer has been wondering weather he should start paying a bonus for "performance" (basicly how we manage and complete our workorders) or reducing the pay for "bad performance". The only thing he needs is a way to judge the performance fairly, and that is the trickiest part that requires a lot of thought.
Due to the fact that it is very hard to find a fair way to judge performance in our line of work, he has put this off for many years.

I think I would like to see a system that employs both factors, pay a bonus for really good performance, and reduce your base pay (or some privileges) if your performance is very bad. This keeps an area of "neutral" pay that most people will feel comfortable in.

[Ann Bares]

Siggi:

I don't necessarily agree that adding and reducing pay based on performance are - practically speaking - two sides of the same coin. I think you have to be very, very careful, on a lot of fronts (from employee morale to regulatory considerations), when considering a program that looks to cut pay based on performance results. I can't imagine many scenarios where I would advise this step.

Perhaps your employer would be better advised to focus on defining, communicating and then coaching around clear performance standards. Only after this has been accomplished - and accomplished well - would I suggest that he begin tinkering with pay implications.

[Amit Mohindra]

Ann, thank you for highlighting some of i4cp's work on performance management and pay-for-performance. I'm so glad you included the date of publication, sample size and the definition of organizational performance that we used (market performance indicator or MPI). We pride ourselves on being explicit with our methodology and careful in drawing insights from the data.

Performance management and incentive compensation are two very complex items and combining them into "pay for performance" is fraught with many issues. Individual and organizational performance are very different things yet they need to be tied together to make pay-for-performance work.

One important aspect that is seldom considered is the fact that annual performance management is a "repeated game." The players - employees, managers, and the company - learn from each others' actions every cycle and adjust their behavior to maximize their self-interest. People say "you can game the system" without realizing that game theory is a good lens through which you can evaluate a performance management program and improve it.

[online writing]

The only thing he needs is a way to judge the performance fairly, and that is the trickiest part that requires a lot of thought.Poor processes usually produce bad results, even if the intent is good and the objective is desirable. Likewise, good process enhances the probablilty of positive desirable outcome results. We need to master both.

[Ann Bares]

Amit:

I am a fan of i4cp's work, so always appreciate the opportunity to highlight pay and performance related data and findings.

Interesting note on looking at the performance system through a game theory lens. Thanks for sharing the comments!

OW:

Good thoughts and advice for Siggi's employer. Hope he's listening.