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How to Link Pay and Job Performance

Posted By APSO, 24 June 2014
Updated: 19 May 2014

How to Link Pay and Job Performance

By: Bruce L. Katcher

Part 1 - THE PROBLEM:

Employees want to feel that their good work is appreciated and appropriately compensated. However, 7 out of 10 do not believe that there is a clear relationship between their pay and their job performance. Let's investigate this further.

  1. Although technically impossible, most employees believe that their performance is above average. Each, therefore, believes that he or she should be paid above average. But this, of course, is impossible.
  2. Most employees feel that they are not adequately paid compared to those performing similar work in other organizations. They, therefore, also believe that their pay is below the level of their job performance.
  3. Employees often perceive that there are poor performers in their organization who are earning as much if not more than they earn. They thus conclude, "If that lazy so-and-so is still here, they must be under-paying me for my good work."
  4. Supervisors don't have the know-how or guts to differentiate between poor, average, and above average performers. They take the simple way out and give everyone the same pay increases each year.
  5. Our employee surveys consistently show that employees say that tying pay to performance is very important to them. We have found this to be particularly true in unionized organizations where the union has negotiated contracts that require their employer to tie pay increases to years of service rather than performance.

Part 2 - WHAT MANAGEMENT CAN DO

Successfully tying pay to job performance is possible but very difficult to accomplish. Here are a few principles that can help.

  1. Make Your Pay-for-Performance Philosophy Clear to Employees There are plenty of good reasons why you might NOT want to link pay to performance. For example,
    • There are few major differences in how well employees perform their jobs.
    • It is very difficult to measure differences in job performance.
    • There is not enough money available to make a big enough difference in how average and above average performers are paid.
    • Linking pay and performance is inconsistent with management's philosophy.

Employees, however, typically assume that above average performers will receive higher pay increases than average performers. Management, therefore, needs to be up-front with employees about whether or not they intend to try to link pay to job performance.

  1. Use Bonuses Rather than Pay Increases Pay increases are much more expensive than bonuses because they commit management to pay the increases every year. One-time bonuses are a less expensive approach that can achieve the same motivational impact.
  2. Rate Supervisors on How Well they Rate their Subordinates Supervisors often sabotage the organization's efforts to improve the pay of good performers by giving everyone in their work group high ratings. Management needs to train supervisors how to conduct their performance ratings. They then need to analyze the ratings of supervisors and base supervisors' pay, in part, on the quality of the ratings they give to their workers.
  3. Train Supervisors How to Talk About Pay Many supervisors undermine their organization's pay for performance efforts by saying things like, "I wish we could pay you more, but all we can do is increase your salary by 5 percent" instead of, "I am delighted to tell you that due to your excellent performance this past year, we are increasing your salary 5 percent."

Supervisors, therefore, need to be taught how to convey the appropriate message that their good performance is being rewarded.

  1. Use Objective Performance Measures Many jobs require tying pay to the subjective ratings of supervisors. These ratings are often contaminated by a host of factors including personal bias, halo, favouritism, central tendency, and leniency. Every attempt should be made to base pay decisions on objective criteria such as sales, attendance, complaints, quality, and productivity.
  2. Weed out Ineffective Performers Most organizations do a poor job of managing poor performers. The presence of poor performers signals to the good performers that how well they perform doesn't really matter. Those who are not performing their job well should be coached, retrained, disciplined, or removed.

In summary, employees typically want to be paid commensurate with the quality of their job performance. Doing so requires a carefully constructed pay program, a commitment from supervisors, and well-orchestrated communications to employees about their pay.

- Bruce L. Katcher

Bruce Katcher, PhD is President of Discovery Surveys, Inc. His firm conducts customized employee opinion and customer satisfaction surveys.

 

Tags:  appraisal  APSO  APSOgram  benchmarking  bonus  compensation  Link pay to performance  pay increase  performance philosophy 

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