Why the Pay-for-Performance Compensation Strategy Fails

May 7, 2015

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When a market leader implements a model, others follow. After seeing how pay-for-performance has worked out at Apple, for example, other companies may want to follow suit. Pay-for-performance in particular is a tempting model because it promises maximum pay for minimum investment. You’d pay for good work, and not pay for bad work.

According to a recent SHRM booklet on the topic,  pay-for-performance works towards the following goals:

  • Pay-for-performance can motivate people to join the organization.
  • Pay-for-performance can motivate employees to perform at the top of their skill set.
  • Pay-for-performance can motivate employees to stay with the company.

While it might work for Apple, the science on pay-for-performance doesn’t check out, and if your company is looking to accomplish these goals, there’s a better way to go about it.

Why Pay-for-Performance Doesn’t Work

The results of pay-for-performance have been studied numerous times, and incentivizing better work by paying more tends to do more harm than good. In one particular study, two groups of writers were asked to write for the sake of impressing, making money and getting into graduate school, while the other were told to write for the sake of self-expression and personal satisfaction. The group writing for extrinsic reasons produced less creative work overall. The same applies to all kinds of work as Paul Petrone (@VoiceGlance), Communications Director at VoiceGlance explains:

"The fundamental problem with pay-to-performance models is that they put all the emphasis on achieving a goal set out by an employer for the sole sake of gaining the reward. But really, to have truly happy employees, it has to be about more than that. A happy, creative employee ultimately isn’t motivated to do their job well because of a perk they might receive. They do their job well because they take pride in it and want to do a great job."

Other Ways to Motivate Employees

If you’re looking for ways to motivate employees to stay longer or work harder, you’re going to have to find ways outside of money to get them working. Fortunately, it’s as easy as saying, “Thank You.” To do good work, employees have to be appreciated; 80% of workers say they’re more motivated at work when their boss appreciates their work. Employees want to know their work matters, and if a boss acknowledges what they did is helping the company in a direct way, they’re going to work better.

CC-Click-ToTweetBird-01.png80% of workers say they’re more motivated at work when their boss appreciates their work.

And if you’re looking for them to stay at your company and help you avoid the heavy costs of turnover, you’ll need to provide growth, as Jason Lemkin (@jasonlk), managing director at Storm Ventures advises.

"You have to find a growth path for the great ones. The great ones will join your company to grow, to learn, to do new things. If they can't grow, they die a little every day. It's your job to understand the career path for all your key employees. And do whatever you can, within the boundaries of reality, to help them achieve it."

This doesn’t mean you don’t need to keep compensation attractive and at the forefront of your mind. It also doesn’t mean that some compensation based on performance management is a bad idea. But stay smart about what your ultimate goals are for the workforce.

CC-Click-ToTweetBird-01.pngStay smart about what your ultimate goals are for the workforce with these tips.

Avoid Schemes And Prosper

Apple’s pay-for-performance works because of a number of factors: it could be their culture of innovation, or that they have big enough coffers to make creative work match compensation. Perhaps their vending machines contain better snacks. Regardless, mimicking models without knowing the environment in which they emerged because they’ve proven successful before is a recipe for disaster. If you want employees to work harder, appreciate them. If you want them to stay, let them grow. If you want better results next quarter, don’t (solely) pay-for-performance.

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Tips, Strategy, Employment, Workplace, Compensation, HR

Sara Pollock
Sara Pollock
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As the head of the Marketing department, Sara makes sure that ClearCompany's message, products and best practices reach and assist as many HR practitioners as possible.

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