The old and boring pay for performance story

Ensure that award targets are tied to realistic performance goals (Photo: Shutterstock)

We recently polled in office the top three things that almost every company says about their HR objectives – the clear winners were: “We differentiate and reward top performers”, “People join us for the culture” and “We focus on developing leaders”. These three tracks are the HR Billboard Top Tracks for the last decade. And given their popularity, it doesn’t appear they will disappear anytime soon.

I am perhaps being needlessly cynical, because at one level, all the three are perfectly important outcomes or drivers for a great HR story for an organisation, but if everyone were to be differentiating rewards for performers and creating a great culture and building leaders wouldn’t your workplaces look very different. I wanted to put down some thoughts on the performance differentiation story that both challenges the belief and provides some simple things to do that organisations should work on to really get some positive momentum on the pay performance story.

Over the last decade, the differentiation of pay based on performance across most companies has at best been minimal – here are some figures at an aggregate pan-India level to prove that.  The percentage of companies in India that have an incentive programme has broadly remained the same (about 94 percent and well there isn’t much room to grow there!). The target payout in variable pay plans has increased by about 1.3 times over this ten year period (effectively if you had 10 percent of your salary as variable pay in 2006, that same number 10 years later is 13 percent!). If the top performer in 2006 was to get a pay increase 1.6 times that of the average performer, the same has moved to 1.8 times. On variable pay, top performers have always got a 1.5 times payout compared to average performers and that ratio has remained the same (there are companies that give only about 1.3 times and there are some that give 2 times – but at an average, the trend remains the same). On the other hand, for a variety of reasons, companies have actually pulled back on long term incentives for middle and junior management employees. And where they exist, it is primarily to retain employees at that level than to drive performance.

Naturally there are exceptions to this boring sameness – and here is what we feel where the good guys are getting it right. I believe in some base principles: First, don’t expect that giving incentives and bonuses to the entire organisation will make everyone work harder – it’s a classical academic belief with doubtful practical application. Incentives matter where work tasks allow clear definition of outcomes – and these jobs are more prevalent as you go up the hierarchy. Use your incentive budgets on the right set of jobs as opposed to spreading it over the entire workforce. The second important thing is to ensure that award targets are tied to realistic performance goals – very often performance goals reflect “ambitions” and some amount incentives are paid out regardless of those goals being not achieved because everyone knew that those “ambitions” were over the top. That takes away the entire faith in the system – there are simple mathematical models to align the payout opportunities to appropriate levels of stretch in targets. Third, use long term incentives to drive performance and not retention – organisations where significant reward has accrued to top performers over multiple years have traditionally had better retention than those where a lot of people have been paid retention money! Finally, teamwork and incentives are somewhat disconnected ideas – and while it is important for an organisation to build a culture where people can work together towards a common goal, it is critical to ensure that incentives provide the opportunity to identify individual achievement.

In summary, Ayn Rand said, “Money is made by the effort of every honest man, each to the extent of his ability.” Organisations that can successfully communicate this message will fundamentally drive a strong performance culture.

- By Anandorup Ghose, Partner – Talent & Rewards, Aon Hewitt Consulting

The thoughts and opinions shared here are of the author.