The system must measure true performance in a way that minimizes random variation, as well as undesired and unintended consequences. It must align performance with ultimate outcomes and monitor performance to discourage cheating" (p. 88). In fact, Lavy suggests that any initial incentive pay program implementation will likely be flawed in some ways, but gradual progress in achieving a viable program is possible if the foregoing considerations are taken into account.
Assuming that organizations can successfully implement and administer such a pay-for-performance program, though, the returns on investment can be worth the effort required - but only if everyone involved "gets on board" with the approach. According to Fiorito, Bozeman, Young and Meurs (2007), "Employees should view incentive pay as a form of support and show increased commitment in return. Despite well-known problems with incentive systems, this basic idea suggests that workers will be more committed in firms where performance is an important earnings influence. Prior research by provides some support for the positive effects of an incentive pay system on commitment" (p. 186). The growing body of research into this area indicates that organizational commitment is a good predictor of a number of important factors that may affect employee performance, including organizational citizenship, absenteeism, and turnover. Research has also shown that organizational commitment is a factor in employees' intentions to seek alternative jobs as well as their intent to leave their existing jobs (Fiorito et al.). In addition, higher levels of organizational commitment have been shown to reduce absence frequency and have been positively to improved organizational outcomes, including job satisfaction and attendance motivation (Fiorito et al.). Moreover, organizational commitment has been shown to be higher in those cases where compensation levels are discretionary, such as in the case of pay-for-performance programs (Fiorito et al.). According to these researchers, "One argument for incentive pay systems is that they harmonize employee and employer interests by aligning incentives. Further, incentive pay systems should promote equity feelings because workers are paid for performance contributions. Accordingly, employees should view incentive pay as a form of support and show increased commitment in return" (Fiorito et al., p. 187).
Such reciprocation is not always forthcoming, though, and in order to have half a chance at succeeding in improving employee performance, though, pay-for-performance programs must receive support from the top-down as well as the bottom-up in ways that are reflective of the organizational culture that is in place. In this regard, Risher (2007) notes that, "The culture is always an important consideration, often the most important, in gaining acceptance for new policies and work management practices like pay for performance" (p. 51).
Therefore, absent an organizational culture that creates a performance-oriented workforce, simply throwing money at top-performers will likely fail to achieve the desired results. As Risher points out, "In an organization with a strong performance culture, employees know what they are expected to accomplish and are emotionally committed to organizational success. They believe in the mission and goals and are quick to put their energy into a task without being asked or monitored" (p. 51). A performance-oriented organizational culture is not difficult to discern because the focus on achieving organizational goals is evident throughout the firm. According to Risher, organizations with a strong performance oriented culture are apparent: "Informal conversations with coworkers frequently focus on performance problems and recent organization results. They tend to celebrate successes as a team or group. The commitment to performance is a way of life in the organization" (p. 51). To help develop and maintain an organizational culture that is performance oriented, Risher provides some solid guidance as shown in Table 1 below.
Management practices that contribute to a performance-oriented organizational culture.
1. Performance is tracked and communicated, both formally and informally, to staff.
2. Performance is continually reviewed, with follow-up actions to ensure continuous improvement. Results are communicated to staff.
3. Regular performance conversations focus on problem solving and addressing root causes.
4. Meetings are used for constructive feedback and coaching.
5. Targets balance financial and nonfinancial performance targets.
6. Corporate goals focus on shareholder value and cascade with increased specificity to lower levels of management.
7. Long-term targets are translated into specific short-term "staircase" targets.
8. Targets are genuinely demanding and grounded in solid economic facts.
9. Performance measures are well-defined, strongly communicated, and reinforced in all performance reviews.
10. Failure to achieve targets drives retraining in areas of weakness or a job change to where skills are more applicable.
Human capital management
1. Managers are evaluated and held accountable on the strength of the talent pool they develop.
2. Training and development opportunities are available for top performers.
3. Ambitious stretch performance goals with clear performance accountability and rewards are established.
4. Company does whatever it takes to retain top talent. 5. Managers are responsible for trying to keep desirable staff.
6. Company tries to provide a unique "value proposition" to attract talented people.
7. Company HR practices are planned to achieve this goal.
9. Company actively works to identify, develop, and promote top performers.
10. Managers are assessed on the basis of succession plans for individuals.
11. Company moves poor performers out of the company or to less critical roles as soon as weakness is identified.
Source: Risher, p. 52.
Some of the more successful approaches to implementing and administering pay-for-performance programs to date provide some useful guidance for organizations considering this approach to employee motivation and in "getting everyone on board" with the initiative. In his case study of one such company, Mcdonald (2006) reports that in 2002, Meyners + Co. initiated an aggressive business development program to better align employee performance and compensation with its core organizational values and competencies in an effort to prepare its staff to perform an additional workload; not surprisingly, the company experienced some problems as it pursuing these goals. To its credit, though, the company operationalized its expectations in ways that made what was expected in terms of improved performance clear to its staff members. In this regard, Mcdonald notes that, "The core of Meyners's training is developing demonstrable competency in seven key areas: client development, client management, business management, technical expertise and work quality, personal participation and professional development, leading and developing others, and administration" (p. 51). To achieve this improved alignment of core organizational values and competencies, Meyners + Co. implemented a pay-for-performance compensation that was intended to reward employees who (a) exemplified the firm's core values, (b) mastered the core competencies required at their level and - contributed to the firm's overall strategic goals (Mcdonald).
The pay-for-performance initiative implemented at Meyners + Co. used a three-tiered structure: (a) salary, (b) general bonus and - firm-profitability bonus; however, Mcdonald emphasizes that administering this incentive pay initiative "involved a lengthy, data-intensive review and elaborate numerical calculations based on multiple evaluation forms filled out annually by supervisors, staff and peers" (p. 51). This unwieldy approach is indicative of the foregoing assertions that any initial implementation effort will be flawed, but the company's management did learn from its mistakes, but this required some time and some setbacks before the lessons became apparent. In this regard, Mcdonald adds that, "When the firm did not meet its goals and the third salary component wasn't given, some staff members felt unfairly punished" (p. 51).
In response to these initial setbacks, Meyners + Co. developed a custom survey that was administered company-wide and determined and found some bright spots among the bad news that suggested the company was on the right track if it made some changes to the manner in which the pay-for-performance program was administered. According to Mcdonald, "As a result, the firm kept its competencies and values unchanged, simplified the pay structure and offered employees other career-development rewards" (p. 51). Based on its revised approach to pay-for-performance, the company established a set of core values that all employees were required to commit to, including organizational cultural concepts such as "collaboration" and "commitment to quality and responsive client service" (Mcdonald, p. 52). These revised policies helped the company to better align its organizational goals with its employee performance and the pay-for-performance program remains in place today (Mcdonald).
The following guidance is provided by Mcdonald for organizations of all types that are considering implementing and administering a pay-for-performance regimen:
Align rewards and performance. Identify key performance competencies the firm expects staff at each level to master and link compensation to them.
Get employees involved early. Soliciting employee input gets employees to buy into the compensation process earlier and better understand its goals and results.
Keep it simple. Avoid the urge to use calculators and complex numerical formulas to determine bonus eligibility. Use evaluation forms that include both quantitative and qualitative assessments of Performance, as well as discussions with supervisors, to determine compensation increases.
Provide resources. Help employees to achieve high performance standards by providing technical and nontechnical training programs that reflect performance competencies.