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Compensating employees based on performance seems like a solid idea.
In theory, it makes perfect sense: High performance equals increased compensation, which further motivates employees and leads to even higher performance. The reality, however, is different enough that it has many human resource experts wondering if pay-for-performance is anything more than a trendy concept.
The root of the controversy lies in the potential problems involved with paying for performance, most of which have, at their root, the same issue: paying employees for something other than what you want. If, for example, your compensation plan is based on incorrect metrics instead of your true competencies, you may be paying employees for improving at things that bear no meaning to your business’s overall development. Or if, as is often the case, the goals your employees are working toward (and being rewarded for meeting) aren’t clearly aligned with your company’s true needs, then you are, again, paying for individual improvement in an area that won’t effectively translate into improved company performance.
These pitfalls don’t mean, however, that pay-for-performance is a bad idea.
Instead, it means that if you want to include pay-for-performance as part of your employee compensation plan, you have to ensure you’ve structured the plan correctly. Including it as part of an overall strategic performance management system may be the answer.
An effective performance management system that is integrated with your company’s competency framework will ensure you are measuring and rewarding your employees based on mutually agreed upon needs and goals. Just as important, such a system means employees are reaping the benefits of a strong, active management system that features regular feedback and supervisor interaction – two features that are integral for continual employee improvement, regardless of compensation.