Pay for Performance Pitfalls

Posted on: February 6, 2018

Pay for Performance is a little like Uranium 235. If used correctly, it can power a city, if used incorrectly it can blow it up. We are big proponents of pay for performance and incorporate it in all aspects of our company. From our experience, PFP can really turbo charge productivity….. if it is done right. If not, it can create turmoil and greatly harm both morale and productivity.

Here is a list of some pitfalls to be wary of when designing a pay for performance program:

1. Beware of unintended consequences!

Many years ago, a sales person told me a story about his commission plan at a large national temporary staffing firm. He was given x% of the gross margin as a commission. He discovered that if they used back up staffing firms, their commission system erroneously calculated the gross margin at 100% and not the normal 15% or so staffing firms usually make. Financially he was incentivized to use as much backup staffing as possible which he did and made substantial commissions at the expense of the company’s profit. Personally I found it rather unethical, but the point is, incentives influence behavior so you really need to think through every aspect of your incentive program.

2. It is much easier to give than to take away

I read a case study about a failed pay for performance program at Xerox. When they first rolled out the program, productivity jumped dramatically but management got upset and felt the employees were sandbagging prior to the incentive program. Management responded by cancelling the program. Morale collapsed and productivity dropped to below where they were prior to the program. From our experience, when you rollout a pay for performance program it is important to communicate to the employees that there may be changes and adjustments. That way if you do need to make a change, they will not be completely surprised. It is also much easier to increase the payout than it is to decrease it.

3. Take a holistic approach

You should include multiple factors in your pay for performance program. If you focus solely on productivity, quality may suffer. If you focus solely on quality, productivity may suffer. The goal with any incentive program is to positively influence and reward good performance. The pay for performance program for the employees should be aligned with the goals of the company. That way if the employees are earning good bonuses, the company should then be saving extra money through productivity gains.

4. Pay bonuses frequently.

The frequency of the bonus should correlate to the position in the company. A General Manager of an operation is responsible for overall profits so they may get bonuses quarterly or annually. However, the production workers, the goal is to motivate them to work as best possible every day so paying their bonuses on every paycheck will give quick feedback as to their efforts and success.

5. Bonuses should be based on factors the employee can affect

PFP based on company profitability may work well for management but an employee on a production line can only affect their level of productivity and has little overall impact on things like sales, margins etc. Your PFP program for production workers should focus on the things they can directly impact: Safety, work quality, productivity levels, etc. That will motivate their behavior which then ultimately benefits the company.

6.  Pay for Performance should save you money!  

A well designed PFP program should be self funded out of the cost savings created by employees from increased productivity.  The quickest way to have the plug pulled on PFP is if it causes gross labor costs per unit to go up.  PFP is really a gain share program where some of the savings are paid to the employees as bonuses and some fo the savings goes to the company.  If PFP does not drive your costs down, then it is designed incorrectly and will need to be tweaked.

7. Keep it simple.

We too often see overly complex PFP programs that the employees just do not understand. If they do not understand it, then it is hard for them to know how their behavior directly impacts their bonus. A good pay for performance program should be clear and easily understood by all and the employees should know exactly how it is calculated and how they can achieve a bonus through their efforts.

Building a pay for performance program requires a lot of thought and effort, but the rewards are definitely worth it!

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