paying for everyone’s performance: impossible dream … · paying for everyone’s performance:...

Paying for everyone’s performance:Impossible dream or the most exciting opportunity in decades?

Alan Gibbons

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No “One-Size Fits All” anymore…

…or does it?

It’s really hard. For the first time in history, five generations are in the workforce. Each generation has distinct characteristics and necessitates specific approaches to managing & rewarding talent.

Tenure

Silent Gen(1925 – 1942)

Baby Boomers(1943 – 1960)

Net Generation(1982 – 1998)

RetirementEntry into Workforce

Generation Y

Generation X(1961 – 1981)

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Do Monetary Incentives MotivatePerformance?

• This is one of the fundamental questions for reward professionals

• The purpose of rewards systems is often said to be to “attract, retain, and motivate”

• That’s a tall order…• Are rewards effective? Some say no:

– Kohn, 1993, HBR: “The bottom line is that any approach that offers areward for better performance is destined to be ineffective”– Pfeffer, 1998: “Literally hundreds of studies and scores of systematicreviews of incentive studies consistently document the ineffectivenessof external rewards.”

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Theoretical bases for Rewards Effects

Why Might Rewards Work? • Because they have a Motivation effect

• Expectancy theory

• Goal setting• Information effect – gives feedback on performance• Regulatory effect• Etc.

Why Might Rewards Fail?• Motivation effects may be too weak• Money is a hygiene factor, not a motivator (Hertzberg)

• Negative effect on intrinsic motivation undermines extrinsic motivation (see Gerhart & Deci)

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The effect on intrinsic rewards (Deci et al.)

• Among children and students, extrinsic rewards for performance may have a small detrimental effect on intrinsic motivation

• Any Detrimental Effect is Smaller for College Students than for Children• No Detrimental Effect on Creativity

• No evidence of detrimental/negative effects in workplace settings on:

• Intrinsic Motivation• Total Motivation• Performance (including Creativity)

• Workplace incentives can have large positive effects on performance

• Who Employees Are (Attract/Retain/Sorting)• What They Do (Intensity, Direction, Persistence)

• A Useful Takeaway: money Is Not The Only Motivator. Intrinsic Motivation (interesting,

challenging, enjoyable work) And Other Rewards Are Also Important.

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But how do rewards impact on creativity?

Claim: People are “controlled” by rewards, which is especially damaging to performance that requires creativity and innovation.

Alternative View: Learned industriousness theory (Eisenberger, 1992), “focuses on the informational aspects of rewards…that [guide] goal directed behaviour and, thus, increase creative performance”

Evidence: Meta-analytic review found that in 34 experimental studies, the use of extrinsic incentives contingent on creative performance resulted in a positive effect on creative performance (Hedges g = .62), meaning that creative performance was .62 standard deviations higher (not lower) when extrinsic incentives were in place.

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What about the literature?Locke, E.A., Feren, D.B., McCaleb, V.M., Shaw, K.N., Denny, A.T. (1980). The relative effectiveness of four ways of motivating employee performance. In K.D. Duncan, MM. Gruenberg, and D. Wallis (Eds), Changes in Working Life. New York: Wiley

– Stajkovic, A.D., & Luthans, F. (1997). A meta-analysis of the effects of organizational behaviour modification on task performance, 1975–1995. Academy of Management Journal, 40, 1122–1149. Jenkins, G.D., Mitra, A., Gupta, N., & Shaw, J. (1998). Are financial incentives related to performance? A meta-analytic review of empirical research. Journal of Applied Psychology, 83(5), 777-787.

– Bucklin, Barbara (2001). Individual monetary incentives: A review of different types of arrangements between performance and pay. Journal of Organizational Behavior Management, 21(3), 45-137.

– Condly, S.J., Clark, R.E., & Stolovitch, H.D. (2003). The effects of incentives on workplace performance: A meta-analytic review of research studies. Performance Improvement Quarterly, 16(3), 46-63.

Rynes S L Gerhart B & Parks L (2005) Personnel psychology: Performance evaluation and pay for performance. Annual Review of Psychology, 56, 571-600.

– Gerhart, B., Rynes, S.L., & Fulmer, I.S. (2009). Pay for performance: Individuals, groups, and executives. The Academy of Management Annals, 3:207-271.

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And the conclusions from the literature?Locke et al. (1980): Individual pay incentives increase productivity by an average of 30%

Stajkovic & Luthans (1997): There was a 17% average increase in performance from OB Modification interventions; however, no clear differences in effects of money versus nonfinancial rewards (feedback) and social rewards (attention, recognition, praise, commendations), or various combinations of these

Jenkins et al. (1998): In a study of 39 studies with 49 relationships, financial incentives had a corrected correlation of .34 with performance quantity but were not related to performance quality

Bucklin (2001): “Similar to the results of previous studies, . . . Monetary incentives with feedback increased performance appreciably in comparison to hourly wages with feedback. Perhaps one of the most interesting findings to emerge is that performance improved appreciably when individuals earned only small percentages of their total or base pay in incentive pay; percentages as low as 3% of total pay affected performance.”

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And the conclusions from the literature? (2)Condly et al. (2003): Meta-analysis of 64 studies in 45 papers on the use of incentives to motivate performance found that “The overall average effect of all incentive programs in work settings and on work tasks was a 22% gain in performance.”

Rynes et al. (2005): “… in the real world of organizations, PE [performance evaluation] and PFP [pay for performance] are two of the most powerful tools in an organization’s motivational arsenal . . . Money is a very powerful motivator indeed.”

Gerhart et al. ( 2009): “… prior research has convincingly shown that PFP [pay for performance] can have substantial positive effects on performance, and that these effects occur through both incentive and sorting mechanisms.”

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And employees are very clear about what they value….

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High performers deliver the goods…..

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So overall we can say with confidence that….

• The reviews are unanimous: monetary incentives motivate performance

• Employees say – show us the money• This conclusion is not a matter of serious debate among

academic researchers – they get it• The focus has shifted from whether incentives work to deeper

questions, such as:• what types of incentives work best in what types of

organizations;• what types of employees respond to different incentives, • how to implement incentive plans effectively.

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Paying for everyone’s performance:

Part Two:How have we been doing?

In summary, it’s a great idea and proven to work, so what kind of track record do we have?

Oh dear….15

When far-sighted companies have taken time to cast a cold eye over how they have been served by their Reward and Talent professionals, often the verdict is not flattering.

Businesses want to know why traditional Reward & Talent strategieshave failed them during recent tough times. But have they really failedthem? Is this a “knee-jerk” reaction, a search for a scape-goat, or arare moment when we realise that things have to drastically change?

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There is certainly a new mood of single-mindedness. Old ways arebeing replaced by newer, stripped-down approaches which questionthe value of every investment in Talent and Rewards.So what have businesses been saying?

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“Come in – we have a lot to say about HR…..”

Conversations & Challenges

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“HR and Compensation let us down in challenging times when we needed help most”

“Had HR and Compensation been balanced for troubled and good times, we would not have taken

such a powerful hit when business began to collapse”

“Too cumbersome and focussed on entitlement, paying competitively, and providing trendy work-life

and best-place-to-work benefits….forgot we are a business””.


“Nearly automatic base pay adjustments, sales incentives and work-life good-guy benefits work

when times are good, but not when we were challenged”

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“All we could do was review poorly-completed performance appraisals and obsolete job

descriptions”

“Paying for jobs, rather than skills and competencies, made it impossible to identify the talent we needed to

aid our recovery”

“…”Being competitive” was copying practices of other soon-to-be-distressed organisations and not thinking about what best could be done to focus key talent on

making the organisation a success”

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Now, we use every pay and recognition opportunity available to us to communicate that performance matters.

We are not afraid to send hard messages after all that we have been through as an organisation.

Value-based culture…

…a great incisive quote:

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So are we learning??The intent of pay for performance…

Value of contribution

Leve

l of

Rew

ard

pro

vid

ed

TheIdealOutcome

TheHistoricalReality

Level of Reward is commensurate with the results produced

Low

Low

High

High20

It looked as if we didn’t really mean it…

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Good performance distributions: bland outcome…

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Poor differentiation between the good and the average

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Bland performance distributions (2)

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But the evidence is there that performers deliver value

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Do we want to?

This is a pretty sorry track record – but there is light at the end of the tunnel…there is good future intent.

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Reward is being seen much, much more in the future as an investment and not a cost:

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There will be far more pay differentiation in the future:

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Performance Management will be the prime focus in future:

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There will be far more pay emphasis on individual performance in the future:

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Less focus on market pricing, more on consistent , longer-term messages

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Increased emphasis on the need to motivate:

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And all of this goes hand in hand with vastly improved communications

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Part Four:The future:How will we?How can we?

By being single-minded.

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No more drifting towards mediocrity

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The slide to mediocrity (4)

The cult of “sameness” has become the mantra of many Compensation professionals –and it is not what the business wants to hear.

What did we do wrong? All we wanted was to be the same as everyone else!

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Let’s be better gate-keepers

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Transforming TCC

A big shift, but the brave are going there

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Part Four:How will we?How can we?

It’s about being single-minded, so let’s get back to basics.

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What do we know about our people?

1. We know what they do

Grade1 Grade6InternalEquity

Grade5Grade2 Grade3 Grade4

Jobdetails– Kipling’s6honestmen

$ $$$$$Marketworth

$$$$$$$ $$$ $$$$

“I keep six honest serving men, they taught me all I knew,their names are What and Why and When

And How and Where and Who.”

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Mission-criticalCoreNecessaryDispensable

2. We know how they perform

Grade1 Grade6InternalEquity

Grade5Grade2 Grade3 Grade4

$ $$$$$Marketworth

$$$$$$$ $$$ $$$$

Jobdetails– Kipling’s6honestmen

ExceptionalHighAverageLow

Leads aspects of the business that strengthen results

Preserves and/or supports aspects of the business that maintain results

Manages aspects of the business that impact results

Drives aspects of the business that optimize results

1. We know what they do

What do we know about our people?

What else do we know about our people?

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Mission-critical

Core

NecessaryAssess strategic

impact of the role

HighAverageLow

PerformanceThe Individual

The Role

Invest & Develop

Motivate & Performance Manage

Divest/ Outsource Dispensable

Exceptional

Reward, Incentivize& Motivate

X

X

X

2. …and, we know how they perform1. So, we know what they do

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ComplexTransactional

Total Cash Compensation at

target performance

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Total Cash Compensation at target performance

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Using this model to create real differentiation

• No merit increases• In- Grade movement strictly for (minor) market

adjustments• No increments• Zero pay-outs for most makes room to pay the high

performers• Carve out = all merit budgets• Some lump sum merits for certain jobs• Variable timing to smooth out the payments

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Using this model to create real differentiation

• No merit increases• In- Grade movement strictly for (minor) market

adjustments• No increments• Zero pay-outs make room to pay the high performers• Carve out = all merit budgets• Some lump sum merits for certain jobs• Variable timing to smooth out the payments

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Carve out options

Traditional

Attila

Retaining Merit

Before Carve-out After 2.5% carve out(3% Budget)

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• “Line of sight” has top priority• Simplicity – 3/5 metrics – no more!• Carve outs - always• No limits on incentives which can be achieved• Clear personal and team incentives• Strong links to personal development as the non-

cash component• Play a longer game• Retain the ability to astonish your people

Top design considerations: TCC (Short term incentives)

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Inputs & outputs

Business wide Individual PerformanceIndividual Recognition

Gain sharingTeam awardsProfit sharing

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Line of sight: Putting the Employee in the Driving Seat

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Productmix




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Play a longer game

Reproduced by kind permission of Sibson Consulting

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Takeaways from this session• Incentives for performance – yes, they do they work!• Exclude jobs which we need done to a specific standard • Stop slavishly following the market• Dump annual merit increases and incremental money-

wasting• Never underestimate the power of modest incentive

payments• Empower the individual: they are the purpose and the

customer – show them the money!• Great Job Descriptions drive performance incentives• Pay only for exceptional performance – everyone else is just

doing their job!

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The Reward Practice5 St. John’s Lane

London, EC1M 4BHUnited Kingdom

+44 (0)207 549 2865Registered in England

Thank You for listening.

Alan Gibbons

The Reward Practice5 St. John’s Lane

London, EC1M 4BHUnited Kingdom

+44 (0)207 549 2865+(44) 7768 812530

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