Pay for Performance is Given a Poor Grade

Money on hand.
Money on hand.

Employers have long embraced the notion of paying for performance. But are these programs really making a difference? Are they really leading to better employee performance?

If we’re to believe the latest survey of 150 companies coming out of Willis Towers Watson, the impact these efforts are having on organizations leaves something to be desired.

According to the Arlington, Va.-based consultancy, the vast majority of North American employers say their pay-for-performance programs are falling short when it comes to driving individual performance.

Moreover, the survey finds that only one in five companies (20 percent) find merit pay to be effective at driving higher levels of individual performance at their organizations. Further, just under one-third (32 percent) report their merit-pay programs are effective at differentiating pay based on individual performance.

Nor are employers the only ones giving these programs low marks. Only about half of employees say these programs are effective at boosting individual performance levels; and even fewer (47 percent) believe annual incentives effectively differentiate pay based on how well employees perform.

Why the low marks?

Part of the reason is employers are either trapped in a business-as-usual approach or suffering from a me-too mentality when it comes to their programs, according to Laura Sejen, global practice leader for rewards at Willis Towers Watson.

Sejen elaborates …

“Pay-for-performance programs, when designed and implemented effectively, are great tools to drive performance, and recognize and reward employees. However, conventional thinking on pay for performance is no longer appropriate. Companies need to define what performance means for their organization[s] and how managers can ensure they are driving the right performance, and re-evaluate the objectives of their reward programs to ensure they are aligned with that definition.”

Nearly two-thirds (64 percent) of those surveyed say managers at their organization consider the knowledge and skills required in an employee’s current role when making merit-increase decisions, according to the study. That compares to fewer than half (46 percent) who say their programs are designed to take these performance indicators into consideration.

The Willis Towers Watson findings probably shouldn’t come as a huge surprise to those in HR, since they echo the findings of other studies we’ve reported on in the past.

Roughly a year ago, for instance, we reported on research by Organizational Capital Partners and the Investor Responsibility Research Center Institute that found 80 percent of S&P 1500 companies are not measuring the right metrics, over the right period of time, for performance-based executive compensation.

So what’s the key takeaway here? Well, if we’re to believe the research, it’s the fact that employers clearly have a lot more work to do when it comes to pay for performance—and no one knows this better than the companies themselves.

But, of course, knowing and doing something about it are two entirely different things.