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Pay for Performance: Show Me the Money

Michael Vick, quarterback with the Philadelphia Eagles, recently signed what is being referred to as a "$100 million, six-year contract." Not bad for a guy just two years out of prison. If that dollar figure seems astronomical and too good to be true, that's probably because it is. Vick will most likely earn far less than the headlines suggest. So where does the $100 million figure come from?

Pay for performance

You see, Mr. Vick has the potential to earn up to $100 million dollars over the course of the next six years, but some pretty extraordinary things are going to have to happen for that to occur. In reality, only about $36 million of that $100 million figure is guaranteed (yes, "only" is used rather loosely here, but you get the idea). Vick and the Eagles need to hit some pretty lofty performance goals for him to achieve the total payout. That includes a couple of Super Bowl wins (organizational performance, anyone?).

Sports are full of examples of pay for performance. The amount of money a golfer receives for playing a tournament is directly related to how he or she finishes. It could be millions, or it could be nothing. It's the ultimate in forced ranking. Team sports often include bonuses for achieving certain playoff or championship wins.

How about your organization? Do your superstars (your franchise players, if you will) stand to earn more rewards if they go above and beyond? Are your incentive rewards tied at all to overall organizational performance?

i4cp's Tying Pay to Performance study found that 91% of respondent organizations do, in fact, tie pay to performance. That's an increase from the 78% that said the same in i4cp's 2009 iteration of the study. However, just because most companies say they're using pay for performance doesn't mean they're using it effectively.

Pay for performance in high-performance organizations

As outlined in i4cp's newest study, high-performance organizations maintain a stronger link between pay and performance, and they approach that link more strategically and effectively.

High-performing organizations primarily use a pay for performance strategy to recognize and reward their high-performing employees, while low-performing organizations are more likely to say they use pay for performance to help achieve corporate goals. High-performing organizations are also more likely to reward their top performers with higher bonuses and larger merit increases.

And high-performance organizations recognize that goals and objectives used to set performance scales must be things employees actually have some control over. They also realize that continuous feedback adds further visibility to the way in which individual performance is tied to overall organizational goal attainment. People need visibility into how they make a difference, and the direct line from employee performance to corporate goals is not always easy to see.

Tying pay incentives to specific goals that are aligned with corporate goals can definitely help overall organizational performance. Most companies seem to understand this. The trick, however, is to set goals that are truly aligned with organizational performance to ensure that employees are focused on objectives that simultaneously benefit them and the company.

In other words, tying pay to performance to help achieve corporate goals is great, but the link needs to be more granular and personalized to recognize the exceptional contributions coming from higher-performing and other highly valued employees.

A balancing act

Pay for performance is a precarious balancing act. Aligning corporate, team, and individual goals is not as easy as it sounds. There is also a real danger of alienating or disengaging the heart of the workforce who may not be superstars, but who make the entire machine run. Michael Vick may get the glory and the big contract, but it's the other players on the field—the offensive line, the receivers—who help him succeed. If Vick makes the plays, the team wins. If the team wins, everybody has a chance at earning extra incentives. Both need a reason to bring their “A” game.

I'm not suggesting structuring every employee's incentive plans around goals that have almost no possibility of being achieved. A professional athlete only being assured of a third of a multimillion dollar contract may get him motivated, but try pulling that with someone earning $45,000 a year and see what effect it has on performance (or for that matter, retention).

Ultimately, organizations need a pay for performance system that's customized to their individual workforce and incentive program needs. No matter what mix of individual, team and organizational objectives are chosen, however, they must drive behaviors that positively impact performance in a way that result in organizational goal attainment.

For instance, at i4cp member company Amway, the company utilizes a mix of annual bonuses and merit pay to reward performance. Merit increases are influenced by competency rating scores, whereas bonuses are determined by the employee's objective ratings as compared to the performance of their peers.

Tying pay to performance effectively is not an easy thing to do. But identifying a system that works for the organization, that rewards highly valued employees while simultaneously encouraging the masses to remain focused on corporate goals, is critical to achieving high performance.

So while Amway's pay for performance system works for them, it may not be as effective somewhere else. It's unlikely that the Eagles will adopt it anytime soon, and Amway employees can give a sigh of relief that they won't have to achieve two Super Bowl wins before meeting their own performance goals.

About the Author(s)

David Wentworth, i4cp is a senior research analyst for the Institute of Corporate Productivity (i4cp). For more information, visit www.i4cp.com