Upfront: Pay-for-Performance Programs Underperform

Why communication and measurement of programs' outcomes are key.

In recent years, many companies have implemented performance-based pay programs, yet few have done enough to ensure that this compensation method is successful in meeting their goals, according to a recent survey of 290 organizations that have in place pay-for-performance programs. The survey was conducted by Hewitt Associates and WorldatWork.

Companies considering pay for performance should take note of the results: Only 17 percent of respondents described their program as very successful. Nearly three-quarters said it is somewhat successful, and 11 percent said their program is unsuccessful.

"The good news is that companies are trying to motivate through performance," says Paul Shafer, a business leader for Hewitt Associates in Lincolnshire, Ill. "The bad news is that few organizations do enough to motivate this way, so in many cases, employers are unintentionally reinforcing an entitlement mentality among employees."

Lack of communication is a key factor behind this disappointing showing. "It's futile to try to establish a pay-for-performance culture without openly discussing goals, how to accomplish them, and what [they mean] to an employee's pocketbook," Shafer says. "Pay-for-performance programs without proper communication lead to a culture of employees who are confused about company priorities and don't know what to focus on to maximize performance dollars."

Anne Ruddy, executive director of WorldatWork in Scottsdale, Ariz., adds, "Without measuring the effectiveness of these initiatives, companies will never know if they're realizing the full benefit of paying for performance."