Many Companies Fail to Achieve Success with Pay-for-Performance Programs

Companies nationwide are placing greater emphasis on performance-based pay (in both salaries and bonuses), yet most have done little to ensure this approach to compensation is successful in meeting their goals, according to a new study from Hewitt Associates, a global human resources consulting and outsourcing firm and WorldatWork, the leading association for total rewards professionals.

Hewitt and WorldatWork surveyed nearly 350 WorldatWork member companies in its “Paying for Performance” study, and found that 83 percent 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 percent), retaining top performers (69 percent) and increasing customer service (59 percent).

“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 Hewitt/WorldatWork study reveals three factors that are impacting the success of pay-for-performance programs: culture and communication, funding and differentiation, and measurement.

Culture and Communication

Of the companies classifying themselves as “not successful” at performance-based pay programs, 91 percent reported their pay-for-performance cultures were weak. Conversely, nearly all (98 percent) of the organizations with “very successful” pay-for-performance programs said they have strong or moderately strong pay-for-performance cultures. In addition, less than 10 percent of companies with “unsuccessful” programs have an open approach to communicating pay-for-performance to employees, versus 61 percent of “very successful” companies.

Hewitt and WorldatWork suggest the main reason for a poor pay-for-performance culture is lack of communication. “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.”

Funding and Differentiation

This study also shows that funding is a universal challenge. In fact, nearly three-quarters (73 percent) of companies with “unsuccessful” programs and approximately half (46 percent) of “very successful” companies say funding is a challenge in paying for performance.

Funding issues aside, all of the companies with unsuccessful programs believe they do an average or below average job of differentiating performance pay between high, average and low performers. As for the “very successful” companies, just 50 percent said they do a good job of differentiating pay.

“We believe funding pay-for-performance programs is a challenge for nearly all companies because there is not enough pay differentiation between high, average and low performers,” said Anne Ruddy, executive director of WorldatWork. “High-performing employees can be twice as productive as low-performing employees, yet their compensation can be very comparable. If organizations would simply differentiate pay, it would go a long way toward developing a pay-for-performance mind-set and keeping those high-performing workers as their employees.”

Measurement

Perhaps not surprisingly, only 16 percent of organizations with unsuccessful programs have metrics in place to gauge pay-for-performance effectiveness. This compares to 46 percent of “very successful” companies.

“Measuring these programs annually is critical to their success,” said Ruddy. “There is a significant investment in time and resources to shift and maintain the culture, communication and funding style needed to develop successful pay-for-performance programs. Without measuring the effectiveness of these initiatives, companies will never know if they’re realizing the full benefit of paying for performance.”

Copies of the Hewitt Associates/WorldatWork Paying for Performance study are available through WorldatWork for $7.95 U.S. by calling toll-free 877-951-9191.

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