The move to a pay-for-performance as a core management strategy is particularly challenging if the approach is new to an organization or the organization does not have a well-established performance management process in place. This article addresses some of the key barriers in introducing and establishing a pay-for-performance process and some key strategies to ensure project success.
Pay-for-performance is a well-established and effective management strategy that has become a standard practice in many organizations. While pay-for-performance as a business strategy makes sense intuitively, many organizations struggle to implement the approach consistently and effectively. In a recent Mercer survey reported by Bloomberg BNA reports that “While most surveyed employers (55 percent) have implemented a pay-for-performance program, almost half (45 percent) expressed dissatisfaction with their program.” The survey concludes that one of the largest challenges reported is differentiating merit increases for top performers while maintaining payroll budgets for all employees.
The integration of sophisticated performance management and compensation applications enable organizations to implement the mechanics of strong pay-for-performance business processes efficiently. The overall performance or goal attainment ratings can be used to inform merit or other grant allocations. However, simply configuring and launching a system does not assure that the process will be fair, consistent, and effective. Potential barriers need to be addressed as pay-for-performance processes are implemented. Here are three key barriers to success and some of the key strategies to consider in planning for a significant organizational change effort.
Barrier 1: Not Being Clear on the Business Case for Pay for Performance
While pay-for-performance may make intuitive sense, many organizations do not provide a compelling business case for implementing the program or stress the potential benefits for managers and employees. If an organization has grown and thrived through the years without a formal performance management process and merit-based pay increases, why is one needed now and how will it impact the organization and employees?
Organizations new to formal performance management and incentive programs should be abundantly clear about the rationale and desired outcomes of the process.
Core assumptions need to be clear and reasonable:
- Employees perform at different levels of effectiveness based on time in position, capability, motivation, and engagement.
- Top-performing employees should be rewarded for their increased contribution to the success of the organization.
- Developing an objective and standardized approach to assessing and rewarding performance will increase overall productivity and provide an incentive for top employees to stay and grow with the organization.
For employees, pay for performance is essentially about fairness and rewards for increased performance. For the organization, it is a business strategy with clear implications for goal achievement and financial performance. Keeping these messages simple and clearly articulated by senior executives from the beginning of the change process is essential to project success.
Barrier 2: Not Addressing Pay-For-Performance as a Fundamental Culture Change
When designing and implementing formal performance management and compensation programs, it is easy for project teams to become focused on configuration decisions that impact the overall design of the process. While a robust design is essential for an effective pay-for-performance program, many organizations experience the process as a significant culture change.
Pay-for-performance based on standard performance evaluations introduces at least three significant cultural changes that can be challenging for managers and employees.
Transparency: Formal performance management and compensation processes make performance ratings, feedback and merit recommendations clearly assessable to reporting hierarchies and to HR. Managers who have not addressed performance management or merit recommendations in the past will have their decisions easily reviewed and compared with peers.
Accountability: Formal processes require managers to clearly document their performance assessments and justify differences in pay. Managers who may have grown comfortable in overlooking lower performance or not invested time in performance management will encounter a new level of accountability for the behaviors and results achieved by their direct reports.
Differences in Rewards: If successful, a pay-for-performance process will result in differences in merit increases and potentially other forms of rewards. For an organization that has been acclimated to only cost of living or step increases based on tenure alone, introducing differential pay may represent a significant change in thinking for both managers and employees.
These are significant considerations and best practices in change management suggest that these cultural changes and the rationale behind them are clearly articulated in communication and orientation programs.
Barrier 3: Having the Process Owned and Lead by Business Leaders
An inherent challenge in introducing pay-for-performance is that the process is typically supported by HR, compensation, and IT professionals and can quickly be identified as an HR process. This may lead managers to view the process as less aligned with business than other business processes such as budgeting or forecasting. If the ownership of pay-for-performance is not clearly addressed by senior management from the beginning of the initiative, the HR department may be challenged to both administrate and drive the process. Active involvement and accountability must reside with business leadership if a pay-for-performance process is to be sustainable.
Organizations can take these steps to ensure that pay-for-performance programs are facilitated by HR and owned by the business:
Establish a Strong Governance Structure: Pay-for-performance programs should have a clear governance structure in place including representation by key business leaders. A steering committee should meet regularly to review major system configuration and compensation strategy decisions.
Address Budget Considerations Early: Implementing pay-for-performance may have significant implications for budgeting. Funds allocated for merit and other increases may impact overall budgets. The levels and source of funding for merit-based allocations need to be considered well before implementation.
Hold Business Leaders Accountable for Process Execution: While HR, IT, and compensation staff are typically accountable for system configuration, training and administration, business leaders should be framed as the process owners of pay-for-performance. The quality and timely completion of the process needs to be core accountability of management if the process is to be fully effective.
Changing organizational culture is typically a significant and long-term challenge. At least as much time, consideration, and effort needs to be devoted to communication, training, and change management as process design and configuration.