Study Questions Pay-for-Performance Effectiveness

June 9, 2004 ( - The effectiveness of compensation strategies that emphasize "pay-for-performance" has been called into question by a study conducted by Hewitt Associates and WorldatWork, the association for compensation professionals.

The study, Paying for Performance, found83% of organizations believe their pay-for-performance programs are only somewhat successful or not successful at accomplishing their goals, which include: improving financial performance (79%), retaining top performers (69%) and increasing customer service (59%).

“For companies with pay-for-performance philosophies, the goal is not merely to have successful compensation plans, but to become high-performing organizations,” said Paul Shafer, a business leader for Hewitt Associates. “The good news is that companies are trying to motivate through performance. The bad news is that few organizations do enough to motivate this way, so in many cases, employers are unintentionally reinforcing an entitlement mentality among employees.”

The results of the study then become completely obvious. Hewitt found of the companies that said their pay for performance plans were “not successful,” and the vast majority (91%) characterized their pay-for-performance cultures as weak. Even more obvious was that nearly all (98%) of those companies with “very successful” programs said they have strong or moderately strong pay-for-performance cultures.

Hewitt also found 10% of the unsuccessful programs have an open approach to communicating pay-for-performance to employees, compared to 61% of the very successful companies. It is this lack of communication that Hewitt pegs as the main reason for a poor pay-for-performance culture.

“It’s futile to try to establish a pay-for-performance culture without openly discussing goals, how to accomplish them and what it means to an employee’s pocketbook,” said Shafer. “Pay-for-performance programs without proper communication lead to a culture of employees who are confused about company priorities and don’t know what to focus on to maximize performance dollars.”

Given the lack of communication, it is of little surprise that only 16% of the unsuccessful lot have metrics in place to gauge a program’s effectiveness, compared to nearly half (46%) of the companies that say their programs are successful.Equally non surprising was that all unsuccessful programs believe they do an average or below job of differentiating performance pay between high, average and low performers. By comparison only half of the “very successful” companies said they do a good job of differentiating pay.