Study: Pay for Performance Pays Off

Over 90 percent of U.S. organizations say they are tying salary increases and annual bonuses to performance measures, up from 78 percent in 2009, according to a 2011 study by the Institute for Corporate Productivity (i4cp), a research and advisory organization. Despite these high numbers, the study shows that many companies aren’t executing their pay-for-performance strategy successfully.

The study report, Tying Pay to Performance (available online only to i4cp members), revealed that more than three-quarters of high-performance organizations tie pay to performance to at least a moderate extent, while less than two-thirds of lower-performers do the same.

“The existence of a pay-for-performance strategy alone is not a differentiator between high- and low-performing organizations—most organizations, regardless of market performance, reported that they are using some sort of pay-for-performance strategy,” said David Wentworth, a i4cp senior analyst and author of the report. “Rather, it is the approach taken in executing this strategy that separates the high-performance organizations from the rest of the pack.”

Strategy Drivers Matter

One clear differentiator is what drives the strategy internally. Despite the weak economy and curtailed compensation budgets, just 6 percent of survey respondents identified the compensation budget as the primary driver of the pay-for-performance strategy. Budget constraints are third on the list for low-performers but not even in the top five for high-performers.

So high-performers are driven by something else—and that “something else” begins with a desire to reward and retain top performers and then to derive secondary benefits from that strategy, such as enhanced competitiveness and superior innovation.

The study found that nearly half of high-performing organizations indicated that recognizing and rewarding top performers was the main driver of their pay-for-performance strategy, making it No. 1 on the list of primary drivers. In second place was a much narrower objective—increasing the likelihood of achieving corporate goals.

Lower-performing organizations were not as sure about the drivers behind their strategy. The No. 1 driver among this group was achieving corporate goals, chosen by nearly one-third, while recognizing and rewarding top performers was cited second with 30 percent.

While meeting corporate goals and improving productivity are important short-term objectives related to incentive-based pay, the study suggests that high-performing companies understand that the broader aim is to achieve and sustain long-term competitive advantage by motivating and rewarding their best people.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related Articles:

Salary Increases Stay Consistent, with Focus on Variable Pay, SHRM Online Compensation Discipline, September 2011

2012 Compensation Budgets Remain Lean, with Focus on Top Performers, SHRM Online Benefits Discipline, July 2011

Pay for Performance: Make It More than a Catchphrase, SHRM Online Compensation Discipline, May 2011

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