4 Biggest Risks of Pay-For-Performance

Pay-for-performance programs are being implemented with increasing regularity by organizations today. The ability to see that direct correlation between an employee’s contributions and how much they are paid is appealing to employers and employees alike. However, it doesn’t come without risks. Here are 4 of the biggest risks employers face when implementing a new pay-for-performance system.

4 Biggest Risks of Pay-For-Performance

1. Incorrect Metrics. Metrics are the things that are being measured. These are the foundation of your plan and must represent the measurements of success. A common issue is the misunderstanding of business strategy vs. employee engagement or alignment. “HR people assume they know what the business is trying to accomplish and assume they know the measurements that will drive that or will result from that accomplishment, rather than speaking to stakeholders and really drilling down.” Dan Walter warned in a recent BLR webinar.”You need to really ask a lot of questions because measuring the wrong thing will always get you the wrong results.” Another common issue is motivating one action without considering the impact on other actions. For example, if you incentivize new sales without setting parameters, you could end up with more revenue, but no more profit to use to payout the incentives.
2. Poorly Set Goals. Goals are the specific levels that define success for each metric. These are the drivers of your plan. One common issue is when goal achievement becomes either obviously impossible or virtually guaranteed very early in the life of the program. “If you have a goal that’s either obviously impossible to meet or already met very early in the life of a program—you don’t have a pay-for-performance program.” Walter warned.
3. Underwhelming Communication. Clean, clear, frequent, communications are essential to engaging and motivating your staff. One common issue is that often no time or money is budgeted to continue communicating after the initial roll out of the program.Another common issue is a disconnect between what the HR or Compensation Professionals believe is the purpose of the plan versus management’s actual purpose. Oftentimes the team will determine the objectives and goals and work out all of the rationale and tie it together, only to have HR give a different rationale when communicating about it. Talk to the people that designed it.
4. Human Nature. Human nature is the one thing that you cannot build into your compensation programs, yet it is the single biggest risk to pay for performance. The problem isn’t that pay-for-performance programs don’t work well enough—it’s that they work too well. People will respond to exactlywhat they’re incentivized to do, which means that they will also find loopholes or overlook negative consequences as long as they’re meeting their goals. To get it right, you have to be detailed in expectations.Because pay-for-performance programs do work well when implemented right, many companies assume their compensation plans can/will manage people—but only people manage people. If the program demands high-performance, you must also provide strong management and oversight to get the best outcomes for your organization.

For more information on the risks associating with implementing a pay-for-performance program, order the webinar recording of “Pay for Performance: Best Practices for Embracing the New Normal in Compensation Design.” To register for a future webinar, visit http://store.blr.com/events/webinars.

Dan Walter, CEP, is the founder of Performensation Consulting. Dan has more than 18 years of experience in with equity compensation programs. He has designed and administrated both management and broad-based programs, for both public and private companies.