Tying the compensation of employees to their performance has been widely deemed as the best way to align the rank and file’s interests with the goals of top management.
Most companies that apply performance-based policies to salaries and bonuses, however, have done little to ensure that this approach is successful in meeting their goals, according to a new study.
Human resources consulting firm Hewitt Associates and WorldatWork, which calls itself an association for total rewards professionals, surveyed nearly 350 WorldatWork member companies. Fully 83 percent believe that their pay-for-performance programs are only somewhat successful or not successful at accomplishing their goals, which include improving financial performance (79 percent), retaining top performers (69 percent), and increasing customer service (59 percent).
According to the study, the three factors that most affect the success of pay-for-performance programs are culture and communication, funding and differentiation, and measurement.
Of the companies that described their performance-based pay programs as “unsuccessful,” 91 percent also reported that they have a weak pay-for-performance culture. On the other hand, 98 percent of the organizations with “very successful” programs also said they have a strong or moderately strong culture.
Less than 10 percent of companies with unsuccessful programs have an open approach to communicating pay-for-performance programs to employees, according to the study, compared with 61 percent of very successful companies.
Funding pay-for performance programs is a big problem for 73 percent of companies with unsuccessful programs, but even 46 percent of very successful companies reported that funding is a challenge.
Only 16 percent of companies with unsuccessful programs have metrics in place to gauge pay-for-performance effectiveness, compared with 46 percent of very successful companies.