“I never predict.  I simply look out the window and see what is visible but is not yet seen” – more than a decade ago these were the words of Peter Drucker.  How often do we in HR look out the window these days?  Some recently argued that economic uncertainty has pushed HR practices back on the evolution curve, making HR practitioners focus more on the basics and less on the organization of the future.  Is this the right thing to do?  How do you both emerge from the economic downturn and invest beyond “strategy 101” at the same time?  Turns out that one can’t be accomplished without the other.  There are many interesting projects that can have “beyond strategy 101” impact.  One that I’d like you to consider today is pay-for-performance. There are at least one hundred different theories related to pay-for-performance.  My two cents – none of the traditional approaches work! Let’s look at the reasons.

Remember my blog posting on meaningful performance reviews?  Didn’t we agree that there was no such thing…yet?!  Well, you see, if you base your pay-for-performance strategy on performance metrics that are not meaningful, the entire business process becomes a disaster.  All of a sudden you are not only wasting money on performance measurement that doesn’t move the needle, you are also penalizing yourself further by wasting even more money on rewarding bogus performance.  One way out – implement technology that helps measure performance in real time, incorporating community validation mechanisms into your performance management infrastructure.  By measuring true attributes of success, you will be able to transform them directly into meaningful rewards.

More thoughts on why pay-for-performance may not work…  Consider Jack for a moment.  Jack has been employed with your organization for 5 years.  He is one of your top performers.  You decided to hire a peer to Jack and you offered to pay them more than Jack’s annual salary was at that time.  This new hire never reaches the ranks of a top performer and, according to your pay-for-performance culture, he does not qualify for an equal raise that is available to Jack this year.  All of this sounds right, with one exception.  The culture that you have in place is not “pay-for-performance”, instead it is “pay-increase-for-performance”!  Even though Jack qualified for a higher pay increase, he is still making less money than someone who does not contribute at the same level.  Many companies confuse the two and only implement “pay-increase-for-performance” process, thinking that it accomplished their pay-for-performance goals.  One way out – implement a process by which you can lower salaries of underperforming employees and go beyond eliminating them from merit increase eligibility.  Let me guess, you think this is a good idea but it is too much for your organization to handle?  I understand, but this just means that you have what Jeff Pfeffer calls a “knowing-doing gap”, and you are not alone!  Thoughts?

Tags: compensation management, pay-for-performance, performance management, performance reviews, ROI, talent management