5 Things to Know About Performance-Related Pay

After years of salary ranges and pay caps, many public and private sector companies are looking at Performance-Related Pay as a tool to increase productivity. The programs are being used to spur on higher sales numbers and a greater number of new clients as well as to increase the effectiveness of education. That makes sense when you realize that many managers who are at the top of the salary range for their positions are still doing an outstanding job and should be rewarded. It also makes sense that a little “friendly rivalry” between employees might lead them to try harder to meet or exceed goals. Here are five things that you should know about P4P or Performance-Related Pay programs.

Not Just Salary-Based

Rewards for outstanding job performance are not always salary increases. In fact, one theory, according to the Economist.com, is that these compensations must be kept separate from the regular salary so that the employee understands it is not guaranteed. Workers may receive a gift card, a trip for exceeding productivity standards, or stock shares in the company. Other sources, though, argue that a monetary reward is the best motivator and that salary increases are the most highly-effective means of reward. A reward that can reap future benefits such as an increase in salary attracts the most favorable response.

P4P Programs Increase Competition Between Workers

That fact may be positive or negative. Of course, the quest for a “prize” may spur employees to compete with one another, but that may also result in conflict between them and in loss of motivation for those individuals who are not able to meet the criteria for the reward. In other words, setting up a compensation “game” may bring out the sore losers in employees. The competition may also destroy employee ability to function as a team.

The Programs May Help Corporations Attract Talented Applicants

While this is true, the attraction and retention of quality employees depends upon the programs being consistent and objective. Smallbusiness.chron.com points out that skilled employees understand their worth and are apt to apply to corporations with rewards programs. For those incentives to result in retention and in permanently-improved performance, however, the incentives must be long-term and consistent. One of the problems with these programs is that they don’t work unless they are clearly defined and communicated. There has to be an objective means of determining what constitutes outstanding behavior, such as quotas or other measurable criteria.

The P4P Programs are Not Utilized for All Employees

Generally, clerical workers or people who do manual labor are not included in this type of incentive program. Corporations reserve the incentives for management. In 1989, a study found that 44 percent of companies had a P4P program available to upper and mid-level management. Increasingly, the programs are being used as an incentive program for educators. That is a change from a history of salary based on years of service and education level. The trend in many states is toward rewarding teachers based on increases in student performance on exams.

The Programs May Not Be as Effective as Thought

As mentioned, performance does not always remain high once the reward is attained. There must be consistency and objectivity in setting goals and in evaluating employees in accordance with meeting the goals. In the case of teachers, a study by the Rand Corporation found that P4P did not produce the desired effects. For one thing, student scores did not rise the way schools anticipated they would. The programs did not affect teachers’ attitudes or teaching methods either. Accomplishments for which teachers were rewarded were ephemeral.

It may be that these types of programs are not universally successful in all types of jobs. It may also be that their effectiveness cannot be accurately assessed because some subjectivity is always present in human interactions. In any case, it is apparent that Performance-Related pay may not be a useful motivational tool in all forms of employment.