Research

Pay for performance — Time to challenge conventional thinking

February 9, 2016
| Bermuda, Canada, United States

AT A GLANCE

  • Only 20% of employers in North America say merit pay is effective at driving higher levels of individual performance.
  • Over a quarter of employers, 26%, pay bonuses to employees who fail to meet expectations.
  • Many managers and business leaders are updating their definition of effective performance management to better support changing business models.

Most companies support the concept of pay for performance (P4P) as part of their total rewards philosophy. And they continue to make a significant financial investment in traditional pay-for-performance tools. Yet when it comes to utilizing the ‘go-to’ methods to reward performance, merit pay and short-term incentives, many companies are still using outdated design and implementation approaches.

The world of work and performance time horizons are shifting. There is a growing need to go beyond simply rewarding individual performance in the recent past. And managers can and do play a key role. As organizations refine and adopt new definitions of effective performance management to align with changing business requirements, it’s key to empower managers to make pay decisions based on clear criteria that encompasses past achievements as well as current and future potential.

Our recent research indicates that managers are poised and ready for the challenge. Managers are adopting a broader, more forward-looking view of performance. Consider, for example, the performance indicators managers use to make decisions about merit pay and its intended impact (see figure).

Factors affecting merit increase decisions

In making decisions about merit increases, employer respondents say their managers give more weight to the following performance indicators than was called for in the program design:

Pay for Performance — Time to Challenge Conventional Thinking

Source: 2015 Talent Management and Rewards Pulse Survey #2, North America

This suggests that managers are moving beyond simply rewarding short-term individual performance. They regard performance measurement not just as a look back in time, but also as a holistic assessment for today and the future. In addition, managers give substantial weight to team performance.

Discover more about this emerging trend and other actions that organizations can to take to improve the effectiveness and impact of their pay-for-performance programs.

About the Survey

The 2015 Talent Management and Rewards Pulse Survey #2 includes insights from 150 participating organizations in North America. It fielded September through November 2015.