Does Pay-for-Performance Equal Employee Retention?

April 10, 2006

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When performance management and compensation are linked and strategically aligned, then Pay-for-Performance programs can improve revenue and profit per employee while enhancing retention of a company's MVPs, says a new study.

With so many high-level corporate goons running amuck, one would think that corporate America would've figured out a better way to compensate employees by now. I mean, really, does it make any sense for greedy guys like Jeffrey Skilling and Dennis Kozolowski to be handed over truckloads of money just so they can run great corporations into the ground and give this country a worse reputation than it already has? New research says there is a way to better compensate employees. It's a familiar concept: Pay-for-Performance. If this method were instituted today, we'd probably see a huge spike in productivity, while at the same time the right people would be promoted to the right positions.

Turns out, AberdeenGroup agrees. The research firm's recently released study, "The Pay For performance Benchmark Report", reveals that getting strong and gifted employees to build and sustain a business is becoming more and more difficult, especially as competition for talent increases. Insightful organizations are beginning to understand that human capital, much like financial capital, is an important asset that must be forecasted, tracked and optimized in order to increase overall shareholder value. And seeing as human capital now constitutes more than 60 percent of total cost for knowledge-driven organizations, Human Resources cannot be the only department held accountable for proper human capital management.

This is where Pay-for-Performance comes in. A well-conceived and -executed program can do wonders for an organization's human capital assets. By ensuring that employee goals and objectives are directly aligned with corporate strategic goals, and tracked for performance, the foundation is laid for proper compensation — one of the reasons workers stay in their jobs. Aberdeen says that when performance management and compensation are linked and strategically aligned, then pay-for-performance programs can effectively improve revenue and profit per employee while enhancing retention of a company's MVPs.

Alas, in the wishy-washy world of research firms, pay-for performance isn't for everyone. Here's how Aberdeen absolves itself of any wrong-doing:

Pay for Performance is very complex. What works well for one group of people will not work well for another (e.g., Consultants and Marketing), what works today will not necessarily work for tomorrow (i.e. you have to continually rethink and challenge the plans to keep them stimulating). Getting Pay for Performance wrong can have bad results in both a positive and negative way, e.g. incentivising for low margin business, or incentivising for one type of accreditation at the cost of people not gaining another.

Still, the Aberdeen report discovered an interesting outcome concerning the magnitude of bonuses needed to alter employee behavior. Fifty-one percent of "best in class" respondents feel that a 20-percent to 25-percent "bump" in pay (bonus) is needed to alter behavior, while 58 percent of the "average" performing organizations predict that a 10-percent to 15-percent bonus will make the difference. And while we're on the topic of money, looks like this year is the time for employees to buck for better pay, according to a recent Salary.com article that highlights 2006 salary trends. Out of the Top 10 Salary Trends for 2006, pay-for-performance, landed at number one. The example the article cites is a good one:

Just as a Major League pitcher will negotiate a clause into his contract saying that he will be paid more for exceeding a set performance level, a regular rank-and-file employee can convince his/her employer to pay rewards if they manage to perform at a preset level.

Does your company subscribe to a pay-for-performance model? If not, would you be more dedicated if it did? More productive?

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