The Challenges of Performance Incentive Plans
Pay for performance is one of the oldest and most accepted compensation practices, and in conceptual terms, it is the simplest compensate strategy. If the individual performs or delivers on one or more of what an employer wants then the individual earns more money. This a very linear equation that all can comprehend, accept and execute.
If this pay for performance system is such a simple concept, then why do performance incentive plans fail to perform and sometimes deteriorate employee performance and organizational performance?
Tom Kort and Jason Baumgarten provide us with some great insights on why performance incentive plans are fraught with pitfalls; 10 of them to be exact.
Here are some of their top concerns regarding performance incentive plans:
- Poor plan communication
- Poor alignment with business strategy
- Company lacks best practices or procedures
- Does not drive correct behaviours
- Weak performance management system
- Profit is the only key indicator measured
- Poor allocation of your best people
- Management game playing with resources
- Incentive plan causes internal divisions
As one can see, a simple intellectual concept of ‘work more get paid more’ can have some serious pitfalls. HR has to be aware of where performance incentive plans can go wrong, and if their organization chooses to use them, how to prevent the negative aspects of a poorly executed performance incentive plan. Part two of this blog will continue this discussion illustrating Daniel’s Pink’s theory of performance motivation.
- Research two organizations that have implemented performance incentive plans that have failed to produce the desired results. Compare them to the list above, were the reasons for their failure on the list, if not why did the plan fail.
- Research two organizations that have implemented performance incentive plans that have succeeded, identify what specifically about the incentive plan allowed it to succeed?