One subset to strategic compensation has been the pay-for-performance standard. This standard, like the others for strategic compensation, is set forth to enhance motivation and growth for employees while also keeping their efforts and objectives consistent in an organization. Everyone is driven by money, that is obvious.
Pay-for-performance is rewarding an employer through compensation on their specific skill sets, behaviors, and overall how the organization does throughout each quarter. This standard’s idea is to maximize, or simply raise, the productivity in an organization while also lowering labor costs. 91% of organizations have a link between their employee’s compensation and organizational performance (Snell Cengage Learning).
An obvious concern for this standard of compensation is the “fairness” behind it. Recently, The Wall Street Journal published an article titled “Pay for Performance No Longer a Punchline”. Roughly 6 companies were featured in this article where their CEO’s compensation is shown to be affected by the organization’s performance.
The shift in how CEOs are paid highlights the growing role of investors in shaping executive compensation—and their push to align pay more closely with corporate results. Since 2011, big companies have had to offer shareholders a periodic non-binding vote on executive compensation. Fewer than 5% of companies fail to win majority support, but the fear of a poor showing has prodded companies to alter executive-pay plans, consultants and executives say. ”Investors have more influence over pay than ever,” adds David Wise, a vice president at Hay, which analyzes proxy statements for the Journal. “In this environment, the only way companies are increasing pay is by clearly tying it to performance.” (Scott Thurm)
This trend in compensation management shows performance is no longer being used in a positive light, but more of a negative one. Rather than saying “if you do well, your compensation will be higher than the year previous”, top-level management is now hearing “if you mess up, your salary will get one less zero than before”. The influence that investors and other stock holders have on any given organization directly correlates with how much money the employees are making.
The fairness behind all of this comes into play when determining how exactly performance will be measured. From the outside looking in, an employees input to an organization or task at hand may be much larger than its output. There are times when a top executive may be putting in more time and effort than anyone else in the company. But, with a company disaster, at no fault of his or her own, which turns the bottom line on the company’s balance sheet red, the top executive’s pay is diminished.
However, most of the time, pay-for-performance accurately reflects an employee’s performance and results in a higher job-satisfaction and a classic “pat on the back”. The pay-for-performance trend is becoming increasingly popular in the public and private-sectors. Typically, if the executive performs to their best ability, the company will profit tremendously, resulting in such excess amount of money that bonuses and dividends are paid generously. If the company does not do so well, forms of compensation will be decreased. Companies are constantly trying to align performance and pay to support any long-term success.
This is changing the way executives are determining their next move and setting goals. Knowing very well that every decision made is not only watched by everyone in and outside of the company but also crucial to the overall success of the company.
The Wall Street Journal article noted if performance will always be the sole factor of pay-for-performance or if strategic and accurate goal setting will one day pay tribute.
Another version of this article is published on Jessica’s Blog: http://mmpursuit.wordpress.com/2013/03/24/pay-for-performance/