Is your company ready to implement a pay-for-performance system? There are three questions to ask to make this assessment, says Brooke Green, a principal with Hay Group.

In a BLR webinar titled "Pay-for-Performance: Pros, Cons, and Assessing Whether It’s a Good Fit for Your Organization," Green discussed what a pay-for-performance system is—and isn’t—and advised employers to ask themselves the following questions before implementing such a system.

1. Is performance management effective in your organization? Hay Group surveyed over 100 companies on performance management design and administration a few years ago and found that most organizations have a formal performance management program in place; however, a majority believe that individual employee performance is not managed very well. A significant number of managers view the process as burdensome.

"Most organizations don’t have a lot of faith in how well performance is being managed … If we’re talking about pay-for-performance, it’s unfair to employees … to put in a pay-for-performance plan when the performance management system is broken, because then the credibility of the actual pay-for-performance system is kind of undermined by the fact that the infrastructure isn’t there already and the culture maybe doesn’t support this type of operating model," Green noted.

If performance management is not effective in your organization, you likely have some work to do before you can implement pay-for-performance.

2. Are employees skeptical? Do employees believe in the statement: "the better my performance, the better my total compensation will be."? If employees do not believe this statement, and they don’t have faith in the system, there will be difficulty in using the system as a motivator.

Leading factors for skepticism:

• The limitations of merit pay. If too much of the budget is consumed by cost-of-living and equity adjustments, employees won’t see the point in extending themselves.
• Overlapping objectives. Paying multiple times for the same outcomes, or lack of clarity around objectives and measures.
• Inadequate differentiation of performance. Performance ratings tend to skew up. Many lack the will or the know-how to properly evaluate performance.
• Inadequate differentiation of rewards. Many managers settle for mediocrity rather than make waves in their departments. Many lack courage to provide lower performers with lower pay.
• Misalignment of effort and resources. There may be a disconnect between the reward ROI and administration energy required.

3. Is management willing to differentiate? Management must be willing to consistently apply the pay-for-performance system. The pay difference between mediocre and exceptional performance must be meaningful enough to change employee behavior. The intent of pay-for-performance is to motivate employees to do more for the company. This means that managers will have to withhold pay increases and incentives from poor performers, which is often quite difficult to implement, especially in a culture that typically rewards more equally or gives everyone bonuses.

Honest answers to these three questions can help you determine whether your organization is ready to implement a pay-for-performance program, or whether your existing program could be improved.

For more information on pay-for-performance, order the webinar recording. To register for a future webinar, visit http://catalog.blr.com/audio.

Brooke Green is a principal with Hay Group, where she provides consulting advice and implementation assistance to clients with compensation support needs. Her particular focus is on the design, communication, and execution of broad-based compensation programs within public, private, and nonprofit organizations.