Noma Bruton, EVP/Chief Human Resources Officer at Pacific Mercantile Bank and member of the California Bankers Association, writes on performance management at:
Thanks, Noma! Great minds think alike!
Tag Archives: pay for performance
Motivating Improved Productivity
The academic community and other theorists regularly question whether financial rewards are actually motivational, or just excuses for organizations to manipulate their poor, overworked employees, who would much prefer to be motivated by the implicit value of the work itself.
(See Alfie Kohn: Punished by Rewards.)
Most organizations are very interested in creating ways to manage performance in such a way as to realize productivity and efficiency gains. This generally becomes a process of establishing individual and/or team goals that support the organization’s overall business plan or mission.
Focusing on productivity also provides a unique opportunity for organizations to improve communications at all levels. In the workplace, both employees and their supervisors have their own perceptions about their jobs that frequently don’t match. This, of course, leads to inefficient work habits and less than optimal results.
Developing a system through which performance results are articulated and documented requires participation on the part of all employees. This involvement in a communication process often leads to improved productivity in and of itself – even before the connection to financial rewards is made.
An organization that has functional, established teams whose members acknowledge them as such can benefit from a pay-for-performance plan that provides meaningful financial rewards for collaborative goal achievement. In this context, the facilitation of team processes can be enhanced by making sure that all team members participate equally in the payoff, even if some team members are higher-paid, and/or have higher levels of responsibility than others. In a sense, they all sink or swim together. This creates more peer pressure to perform, which is one of the fundamental benefits of establishing teams in the first place.
If it can be shown that difficult-to-achieve goals were met and/or exceeded, and that they resulted in greater outcomes or better operating efficiencies, senior management will feel comfortable proposing higher pay levels, at both base pay and incentive levels.
Although there is much to be said for creating meaningful work for employees, financial rewards are, for most people, powerful motivators.
– Shari Dunn, Managing Director
Paying for Performance
There are four primary benefits to linking pay to performance:
- Motivate improved productivity consistent with overall organizational objectives
- Improve communications between supervisors and their employees
- Help facilitate team processes
- Substantiate higher compensation levels
As an employer, you probably assume that paying for performance is something that you should at least try to do.
What is performance? Chances are it means different things to different individuals in your organization. To some, it may mean having the tools to achieve results. To others, it may mean the end results themselves. This is a critical distinction.
The tools are the means of achievement: the enablers, if you will. They include skills, traits, and behavioral competencies. These are the characteristics of the employees that enable them to produce results.
The end results are what happen as a consequence of the individual’s competencies. Results include goal achievement, meeting standards, and other accomplishments that can be objectively measured in terms of quantity, quality, and/or timeliness.
Organizations need to define exactly what they mean by performance if they hope to be able to effectively link pay to performance.
– Shari Dunn, Managing Director
Hospital Pay for Performance: Processes and Outcomes
Over the past decade, the medical profession has seen an influx of support for pay-for-performance programs over the current fee-for-service setup that pays for quantity of procedures rather than quality in our nation’s hospitals.
A recently published article in the New England Journal of Medicine studied the results of one such program implemented in 252 hospitals over several years and, additionally, compared those to 3,363 non-participating hospitals. Analysis following the article’s release indicates that the $60,000,000 in incentive payments have produced modest (at best) improvements in hospital processes and have had no effect on the outcomes of those processes.
The program, operating under a contract from the Centers for Medicare & Medicaid Services, focused on 33 process measures in patients treated for congestive heart failure, heart attacks, pneumonia, coronary-artery bypass, and knee/hip replacement. The processes included ranged from whether patients received certain treatment within a time period after intake to whether heart failure patients were given detailed instructions at discharge.
After evaluating the quality and improvement of these processes, performance bonuses were handed out to hospitals with the commonly used “20/60/20” approach. Under this method, 20% of a population is identified with “strong performance,” 60% with “average performance,” and the final 20% as “weak performers.” Hospitals in the top 20% received a 1-2% incentive payment on top of their usual Medicare reimbursement rate, while those in the bottom 20% were subject to a 1-2% penalty.
While the article states that there have been general improvements in the processes, the evidence showing little improvement, if any, in tangible outcomes means that perhaps the system is not focusing its attention in the right area. This does not mean a pay-for-performance model is incorrect for hospitals, but it suggests improvements that can make the model more workable.
- Focus on outcomes – Basing performance solely on improvements in process efficiency ignores the outcomes, which are important in any organization. Mortality rate, which has not been improved during the pay-for-performance period, is one such measure. Outcome goals are important to any organization implementing pay-for-performance. For instance, it may be important to your organization that sales calls be made, and it may even be important that an employee make “x” sales calls per day. The reward, however, should be tied to the amount of sales made at the end of the period. Without an outcome, the processes lose some meaning. Measuring medical outcomes can be much more difficult than establishing a sales goal, but promoting consideration of outcomes can enhance any discussion on how pay-for-performance can work in an organization.
- Make the incentive attractive – Motivation to be a top performer is a goal of any pay-for-performance plan. When an organization dangles a carrot in front of its employees, the reward must be appetizing enough to make them reach out. Adding a 1% bonus to an employee’s base pay for being a top performer would amount to only a plastic bag of baby carrot bites ― 5% or greater looks more like carrot cake.
- Plan fully – Before acting on any compensation plan, it is important to consider all factors and potential ramifications. Rolling out an incomplete plan can lead to ineffective results and a lack of faith among managers and employees. Identifying the processes through which improvement can be achieved is a good first step, but it would be best to tie those processes to meaningful, measurable outcomes before going public with the plan.
– Alexander Shogan, Senior Research Associate
https://companalysis.wordpress.com/
Including Performance Management
Shari Dunn, Managing Director of CompAnalysis, is conducting a seminar for the Northern California Human Resources Association (NCHRA) titled “Including Performance Management in Your Total Rewards Strategy,” on Tuesday, October 16, 2012, from 9:30 a.m. to 3:30 p.m. in San Francisco, CA.
Although the phrase “pay for performance” has become cliché, the concept is sound. It’s the execution that often fails. While some question whether financial incentives actually motivate employees to improve their performance, the causes of failure are more likely flawed program design, implementation and management.
Join us for an in-depth look at how to manage and measure performance more effectively and profitably in the context of your company’s total rewards strategy. Specifically, you’ll leave the seminar able to:
• Define elements of a total rewards strategy
• Distinguish between the means of performance (competencies and behaviors) and the ends (outcomes and results)
• Integrate base salaries and short-term variable cash into a total cash compensation plan
• Sell the new approach to senior management, communicate it to employees, and execute, manage and maintain the plan over time
This seminar qualifies for 5 general recertification credits. For more information or to register, visit NCHRA.
https://companalysis.wordpress.com/
Performance Appraisals
For anyone with remaining doubts about using textbook performance appraisals, this article on Forbes.com should push you over the edge. We should try to encourage employees to develop their technical and behavioral competencies all the time, without the emotional anxiety associated with “reviews” and “appraisals” that are designed to be punitive rather than constructive. This can be accomplished with an excellent employee development program that is divorced from compensation. If you want to truly pay for performance, take the time and make the effort to establish outcomes goals that are objectively measurable in terms of quantity, quality and timeliness, and link the extent to which they are achieved to variable pay, or possibly base pay if you can differentiate enough to make them motivational.
– Shari Dunn, Managing Director
https://companalysis.wordpress.com/
Pay Secrecy: Why Bother?
This post by Ed Lawler, one of the all-time great thinkers on compensation matters, on Forbes.com is nutritious food for thought for all HR professionals! I have always said that what you don’t tell employees about pay has the potential to be more damaging than the truth because the vacuum such absence creates will soon be filled with misinformation. Communicating about pay on a need to know basis is good, but more disclosure is even better, but only when you’ve done your homework and made solid, credible and justifiable pay decisions in a systematic and objective way. So, the order in which this occurs is critical: (1st) make sure your employees’ salaries and bonus actually do reflect job values, internally and externally, and performance, and (2nd) decide how best to communicate both the pay plan design process and the outcomes so that all understand that their pay actually is fair and reflective of their contributions. Some employees may feel that their personal privacy has been violated if their pay is published within the organization, so this needs to be addressed. Another potential downside to transparency is that it may encourage a number of employees to dabble in being a compensation analyst, which is probably not the best use of their time or talents. The communication scheme should also clarify that the only legitimate market data sources are those to which employers (not employees) report salaries, which will disqualify most free Internet sites as purveyors of market values … don’t get me started!
– Shari Dunn, Managing Director
Rethink Your Pay Philosophy
Here’s a thought-provoking article and video about Whole Foods’ approach to paying their retail service staff. It’s a reminder that we all need to re-think and re-communicate our pay philosophies from time to time. Where to pay relative to the market medians, issues about union avoidance, and general concern for employees’ economic well-being are all relevant. Some additional philosophical issues include internal pay equity, linkages to performance measures, and whether tenure should be a factor in making pay decisions.
http://finance.yahoo.com/blogs/daily-ticker/whole-foods-ceo-why-pay-employees-more-131203168.html
– Shari Dunn, Managing Director
The Economic Benefit of Investing in People
Developing an incentive plan that links variable pay to measurable performance outcomes is one way to invest in the future success of an organization. When done well, and treated as a management tool, such a plan can powerfully motivate employees to increase productivity, quality of outcomes, and both short- and long-term results. Incentive plan principles can be applied at all levels in your organization, from the CEO to the lowest-paid staff. Remember that even an incremental increase in productivity, measured in terms of quantity, quality, and/or timeliness, can lead to improved financial and operating results.
Linking pay to performance can also: (1) improve employee morale; (2) enable clearer communication about performance expectations; (3) result in real and perceived pay equity (e.g., top performers earn more); and (4) provide an additional attraction to prospective new employees.
Bottom Line:
The right pay plan has tremendous potential to add value to your company.
– Shari Dunn, Managing Director
Common Compensation Mistakes: Part 1
Organizations need to implement a base pay plan in order to avoid common compensation mistakes. Having a structured base pay plan, as well as a compensation philosophy, helps support an organization’s financial stability by attracting qualified employees, avoiding costly employee turnover and by motivating employees to produce outstanding results. One compensation mistake organizations make is neglecting to benchmark pay practices. Another is not differentiating enough between your top and poor performers when making salary adjustments.
Here are common compensation mistakes to avoid:
- Neglecting to benchmark pay practices
- Failing to align all the organization’s goals
- Using limited pay-for-performance differentiation
- Not calibrating performance management data
- Avoiding transparency in the pay system
- Moving too quickly
- Failing to empower managers
When pay practices are not consistent, employees may feel that they are not compensated fairly. They may think their compensation is not reflective of their qualifications and performance level. When it comes to pay for performance, there needs to be enough differentiation between pay increases among your top and poor performers. If everyone is getting a 3% increase, often referred to as the “peanut butter” approach, then there is little incentive for employees to improve their performance.
– Javier Gonzalez, Research Associate
CompTalk 