The Relationship Between Pay and Performance

Posted by Aleksandar M. Velkoski on August 4, 2009 under General Leadership | Be the First to Comment

Have you ever wondered about the effectiveness of pay for performance programs? Maybe you’ve thought about implementing pay for performance programs at your organization, but don’t know where, or how, to start? In the most recent Academy of Management Annals a nicely-written empirical research article, titled Pay and Performance: Individuals, Groups, and Executives, was published that attempted to clarify this topic. Simply put, the authors attempted to understand three specific items related to pay for performance: the conceptual mechanisms by which pay for performance programs influence performance, specific programs used and whether or not they are effective, and the pitfalls of such programs upon implementation (Gerhart, B., Rynes, S., & Fulmer, I., 2009, p. 251).

To summarize, the research article, published in June of 2009, suggests that “the use and intensity of pay for performance programs is typically associated with better individual, group, and organization performance” (Gerhart et al., 2009, p. 298). However, the authors accurately advise that care and consideration must be taken when considering whether or not to implement such programs. The reason for their caution is in the limitation that one could confidently question whether the relationship between pay for performance programs and actual performance is concrete or rather just casual. The evidence seems to point in the former direction, but, according to the authors, there is a multitude of other research that supports the latter.

Regardless, before implementing any program within your organization, especially incentive programs, you must analyze whether or not that specific program is correct for your specific organization at that specific time (and, of course, long-term). The key is to understand your strategy and how the considered program fits within it. If you don’t have a strategy, then it’s going to be difficult to gauge whether or not that program is correct for you. At that point, you are simply a blind leader of the blind and we all know the result of that scenario (search my previous posts on “leadership quotes”).

I know many of you are probably sick and tired of hearing about “strategic plans” and “strategy,”  but I can’t emphasize enough how important they are. Yet again we can see that without a strategic plan, it’s extremely difficult (almost impossible) to logically guide your organization. You can’t even properly implement incentive programs because you don’t have a long-term, high-level, strategy for how you want to handle human resources. Are you simply hiring to hire? Or, are people your most valued asset? If they are your most valued asset, how can you utilize them to become more profitable? The lesson here is that pay for performance programs can be effective. The question is whether or not you are truly prepared to consider implementing one.

References:

Gerhart, B., Rynes, S., & Fulmer, I. (2009). Pay for Performance: Individuals, Groups, and Executives’. The Academy of Management Annals, 3(1), pp. 251 – 315.

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