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April 02, 2009
Is Pay for Performance Finally Working?
Leading researcher and consultant David Creelman says he first began hearing about pay for performance at least 20 years ago. Finally, for the first time, he relates client companies have been telling him for the last 2 years that it works and works well. What changed?

Paying strategically is hard work. Creelman, CEO of Creelman Research and a specialist in human capital management, spoke to listeners in a recent Webinar sponsored by Halogen Software, a leading provider of human capital management systems. In a spot poll conducted during the presentation, 63 percent of respondents said pay for performance is ‘a lot’ of work, while 13 percent said it’s ‘too much’ work. Another 16 percent acknowledged that it’s ‘some’ work. So if 89 percent of a sample of compensation-savvy HR pros say the administrative burden is substantial, that’s certainly problem #1.

But problem #2, Creelman observes, is that pay for performance is “a dance we do once a year and then forget about it.” In other words, it’s disconnected from day-to-day performance management. And there’s no doubt that all compensation—but especially pay for performance—must be “embedded” (Creelman’s word) in performance management. So what’s made the difference in the last 2 years?

It’s all about automating the process. Creelman (not to mention most HR pros) knows that if the process of determining annual pay changes is difficult for managers, they’ll do a bad job of it. And if all the information the manager needs is available from HR, he or she may not have the time or motivation to retrieve it every year. Not to mention having to create a separate spreadsheet to calculate how a desirable percentage raise for each direct report will affect the manager’s budget for the year. So it’s not surprising, Creelman reports, that every client who has announced that pay for performance is finally working—a few have even termed it “fun”—has implemented an automated system for a greater or lesser percentage of the work.

Think about the kind of data a manager with multiple direct reports needs in order to determine annual raises, bonuses, or other incentives: The budget he or she has to work with, each individual’s performance rating, current salary, salary history, position in pay grade, notes the manager made through the year on each person’s performance—and most of all the schedule for completing the process on time. Halogen Software’s offering automates all that information, generating e-mail messages to managers that announce when each step is due. Systems are available from a variety of other vendors, but Halogen notes that it particularly targets small and mid-sized businesses.

What else is involved? Creelman says that determining appropriate compensation structures and communicating them mostly revolves around psychology and sociology, not engineering. He gave an example of three reward schemes: In (1), retail associates are told that if they sell $2,000 worth of the company’s merchandise in a weekend, they will be given a $100 bonus. Bonuses are awarded annually. In (2), the same bonus for the same achievement is offered, but each week there’s only one winner. The manager announces the winner in a group meeting and berates the rest of the salespeople for failing to meet the quota.

Scenario (3) is again based on the same bonus for the same quota, but the manager convenes the group weekly, praises everyone for their hard and skillful work, says they will be treated to coffee and—and then awards the bonuses where appropriate. It’s not much of a leap to guess which structure works best, but there are lessons to be learned here, says Creelman. Compensation is less about money (provided the pay scheme is adequately competitive) than it is about what he calls “signals.”

Here’s another of his examples: An employee who gets a $900,000 annual bonus will always be overjoyed, right? Wrong. He knows of a situation in which someone was given that amount and was insulted enough to quit. He thought he deserved the nice, round sum of $1 million and felt disrespected that he wasn’t given another $100,000. Two more Creelman tips: Manage employee expectations throughout the year. And, make bonuses big enough to matter but not so big (like $1 million?) that employees abandon ethics in favor of money.

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