Is Pay-for-Performance the “New Normal”?

Pay-for-performance, once considered a cutting-edge compensation strategy, has now gone mainstream. Dan Walter, CEP of Performensation, says that competition, performance, and reward have become so intertwined and such an integral part of our everyday lives that they should unquestionably affect the way employees are paid. Today and tomorrow, we’ll share some of his insights in this area.

BLR: How does competition in life relate to pay-for-performance?

DW: These days, everything is about competition. We’re seeing things like Google analytics; we’re seeing things like how many “likes” does somebody have on Facebook on a particular post; we’re seeing adults playing video games. So everything we’re doing now is more and more performance-based, performance-contingent, performance-measured.

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For example, we like eBay, where we all get to compete. If you talk to people who spend a lot of time on eBay buying stuff—not the people who buy the occasional table or toy, but the people who buy stuff on eBay regularly—a lot of them will tell you the biggest reason they do that is they like to win the auction.

So we’re seeing more and more performance-based orientation in every walk of life: performance has become the new normal. And pay-for-performance is a way to measure how we’re doing.

BLR: Does pay-for-performance impact a company’s culture and ability to hire employees?

DW: Absolutely. And it means your employees will self-select as to whether or not they will be your employees. It all comes down to whether or not your company is competitive with the other firms that might be hiring similar people. Part of that is culture and part is rewards, like free employee lunches or pick-up services or great stock options.

All of those things come into play. But you can’t be at the very highest level in every aspect of every one of those things. You can’t be in the 95th percentile in everything.

Pay-for-performance allows you to make up for any potential shortcomings you may have somewhere else in your compensation program, your benefits and rewards program, or somewhere else in your culture. Maybe you only offer 2 weeks of vacation, even for somebody who has worked there for 10 years, but the pay-for-performance component allows for enough money that that vacation is really good.

BLR: What are some of the biggest risks to a pay-for-performance system?

DW: The first is incorrect metrics, where you’re measuring the wrong things. Maybe you’re measuring total shareholder return [TSR, a high-level measure of return on company stock], but you should be measuring something closer to peoples’ hearts, souls, and minds. Maybe you’re measuring revenue, but you’re not measuring costs or margins. So you tell people, “We need to get to $100 million in revenue,” but you don’t tell them you have to do that profitably.

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Another risk is underwhelming communication. A lot of companies put out these pay-for-performance plans and later say it didn’t work. They had this big roll out, told everybody all about it, and gave them a 32-page document that explained how the whole thing worked, and a modeling tool. Then, 3 years later the employees didn’t even know whether they had hit their goals.

If you ask what the company said to employees in those 3 years, they might say, “We didn’t want to talk about bad performance because it upsets people; then there was a year when we blew the numbers out of the water, but that was an anomaly, and we didn’t want people to think that was going to be normal, so we didn’t want to make too big a deal out of it.” So, in essence, they didn’t say anything for 3 years; they gave people this complicated program but didn’t talk to them about it after the beginning.

Coming tomorrow: Walter’s thoughts on why trying to keep a pay-for-performance system simple can actually create more complexity and confusion. Plus an introduction to Compensation.BLR.com, the one stop destination for all of your compensation needs!