Pay-for- performance compensation systems are usually implemented in order to focus the entire organization on achieving the corporate goals. Unfortunately, these systems have the unintended consequence on focusing everyone on the pay-for-performance system.
Does it pay for performance?
Many corporate policies often seem to have the opposite effect of what was originally intended. Management by objectives or pay for performance is my favorite example. Although on the surface, it seems like a good way to ensure employees are focused on achieving a common set of corporate objectives, I think it may have the opposite effect in practice. First, I'd like to point out how this compensation system takes time and effort away from achieving the corporate objectives.
I've been involved in implementing a pay for performance compensation system twice now - once as a consultant and once as an effected manager. What seems simple enough at first begins to take on an effort of Herculean proportions, especially because any effort regarding compensation needs to be fair and objective. Typically, the first step in implementing such a system is to determine what the bonus, options, stock grant and salary percentages are by job level. Easy? That's assuming that the company has standard job levels across all functions. If the company has grown as the result of mergers or acquisitions, then consistent job levels are unlikely. So this step involves implementing standard job levels across the company -a huge undertaking, which, by the way, is not part of the corporate objectives.
So let's just assume that job levels are consistent and determining the right combination of rewards per job is fairly easy. You implement a paper-based system, and then you learn a few things:
1. Not all goals are created equal. Some people have a knack for writing easily achievable goals. Others can't be quantified or measured for achievement.
2. Performance is very subjective. What one person judges as a "meets expectations," another person judges as "exceeds."
3. Developing goals at the beginning of the year to be rated on at the end does not allow enough flexibility to respond to changing business conditions.
4. Waiting until the end of the year to review goals does not give anyone the opportunity to course-correct if goals are not being met.
5. There is a tremendous amount of paperwork involved that is hard to keep track of and hard to track for fairness and objectivity. Most companies realize that they need some type of information system to help.
Now in order to address the deficiencies above, new initiatives are required:
- Massive training and communications on how to write SMART goals
- Manager training on how to fairly rate performance objectives
- Business processes to ensure fair calibration, like cross-functional calibration meetings
- HR command and control functions to ensure fairness of goals and ratings and accuracy of information
- Periodic reviews to update goals and course-correct and documentation regarding these periodic reviews
- New information systems that require infrastructure, development, maintenance, user training, and user support staff
So what is the ultimate result? An organization that spends a significant amount of time writing goals, reviewing goals, revising goals, ensuring SMART compliance, approving revised goals, summarizing performance-to-date, reviewing performance with managers, attending calibration sessions, which result in another revision of goals and ratings, and approving periodic reviews in an information system. (See my humorous take on this here.) Oh, and updating and maintaining a performance review system and of course, learning how to use the information system and how to comply with all the processes involved. Now managers spend less face time with their directs so that they can complete all the requisite paperwork. Eventually, managers will object to having more than just a handful of reports so new layers of supervisors will arise so that no one is overburdened with too many performance reviews.
Which all leads me to ask, "What was the point of the pay-for-performance system in the first place?" Oh, yeah, it was to focus everyone on the corporate goals.