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HR Magazine: (Top) Pay for (Best) Performance

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HR Magazine, January 2003Vol. 48, No. 1

When to Tinker or Start Over

Compensation experts say that roughly one-third of performance pay plans fail. Some don’t get set up properly, and some don’t work as well in a poor economy as in a strong one. Even the best pay systems need regular check-ups.

Murray Hill, N.J.-based telecommunications giant Lucent Technologies had a sales compensation system that provided huge payouts to top sales people in the boom days of the 1990s. However, by mid-2001, Lucent’s market had collapsed so precipitously that sales compensation was way out of line with revenues coming in the door. Lucent stopped the pay plan in its tracks. Officials discovered that there were several different sales compensation systems in the corporation and came up with a single plan that they explained in group sessions and one-on-one meetings to gain employee buy-in.

Often, even in non-sales performance pay plans, “at some point it’s better to start over. You can say: ‘We didn’t get it right’ or ‘it ran its course,’” says Ed Lawler, an author, professor and director of the Center for Effective Organizations at the Marshall School of Business in Los Angeles.

But don’t tweak the system too often. “It’s something that should be used consistently,” says Allan G. Bateson, SPHR, senior consultant with Runzheimer International in Baltimore and a member of the Compensation and Benefits Committee of the Society for Human Resource Management. “There’s a problem for employees when an organization switches back and forth.”

“You have to be committed to change for a number of years,” notes Russell Miller, a principal with Washington, D.C.-based Mercer Human Resource Consulting. “It’s always going to be difficult to set up a plan that is viable for every [economic] scenario,” he states. An organization should be satisfied “as long as it works nine out of 10 years.”

The biggest red flag indicating a failing performance pay system is usually fairly obvious. “If you’re paying out the money and not seeing the results,” then it’s not working, says Monica Barron, a senior analyst at AMR Research, a Boston-based business consulting firm.

The goal is to establish a system that makes sense in bad economic times as well as good ones, and not to undermine it by rewarding employees who have not produced.

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