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Study: Keys to Effective Performance Pay
Programs ineffective when managers avoid confronting mediocre performers with low salary increases

By Stephen Miller  12/15/2010

Sibson Consulting’s 2010 Real Pay-for-Performance Study, which examined success factors of pay-for-performance programs at U.S. employers, found a wide variation in organizations’ ability to establish and execute pay-for-performance programs effectively.

“Real pay for performance rewards top-performing staff differentially and can be extremely meaningful for an organization if done right,” said Jim Kochanski, senior vice president at Sibson. The effective application of pay-for-performance vehicles "produces a higher return on investment from compensation by rewarding top performers. This approach begins to eliminate the entitlement mentality," he notes.

Sibson's study is based on in-depth interviews with 27 companies and responses to a survey of 138 organizations. Employers that reported strong results from their pay-for-performance programs, a group Sibson calls the best-results organizations, represented the top 20 percent of those in the study and were said to have “real” pay for performance. These organizations:

•  Provided higher increases to high performers.

•  Reduced "gaming" of the system by giving managers access to detailed rating and compensation data.

•  Taught managers that rating everyone a high performer means less money for the really top performers.

Calibration and Multiple Metrics

In addition, organizations with best-results programs used calibration techniques and multiple metrics to ensure that only true high performers were rated highly. They tracked the effectiveness over time of pay-for-performance measures such as goal alignment and ratings calibration.

Culture Counts

Effective performance pay program design and a good company culture are needed to support a strong pay for performance environment, the study concludes. At organizations with an effective performance pay program, leadership support is considered the leading contributor to such a culture. Organizations with ineffective pay for performance programs tend to blame limited compensation budgets as the cause. Kochanski pointed out that this is often an excuse by managers who want to avoid confronting mediocre performers with low salary increases.

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A sign of ineffective pay for performance programs:
managers who want to avoid confronting their
mediocre performers with low salary increases.
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“Though they may also have limited compensation dollars due to budget constraints or market trends, best pay-for-performance organizations often carve out funds for extra rewards to high performers and tend to see fewer employees whose performance is rated as high,” added Myrna Hellerman, senior vice president at Sibson.

Broad-Based Pay-for-Performance Vehicles
Types of incentive pay respondents used to recognize and reward performance by employees

Base pay increases

91%

Short-term incentives

71%

Spot bonuses

49%

Equity awards

33%

Other long-term incentives

18%

Profit sharing

7%

Other (includes key contributor awards, travel conference awards and special cash bonuses for multiple-role responsibilities)

4%

Source: Sibson Consulting.

Stephen Miller is an online editor/manager for SHRM.

Related SHRM Video:

Compensation Strategy
Focus on HR's host Kathleen Koch speaks to Jim Kochanski and John Rubino about some of the issues today's compensation systems have and advice on how to address them.

Related SHRM Articles:

Pay-for-Performance Plans Would Increase Productivity, Employees Say, SHRM Online Compensation Discipline, August 2010

Bonuses Are Back, with Emphasis on Hard Measures, SHRM Online Compensation Discipline, July 2010

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