Performance-related Pay in the Real World

Remuneration consultants are often seen driving spreadsheets with internal job data and external data relating to remuneration markets. It is therefore tempting to see the profession as strong on numerical analysis, but it would be wrong to assume that this is their sole preoccupation.

Fixed and variable remuneration systems play out in the context of the organization’s broader talent and reward strategies. It is therefore crucial to evaluate how any changes to these systems interact with the longer term incentives reflected in career opportunities afforded to employees – opportunities for promotion, lateral moves, stretch assignments, and work on plum projects or in the favored departments or areas.

It’s also relevant to evaluate how any changes in reward design align with the underlying talent strategy of the organization, for instance, whether talent is ‘built’ or ‘bought,’ the value placed on breath of experience, the relative importance of individual versus team behavior in work processes, and how oriented the organization is to value short- versus long- term performance.

Furthermore, pay for performance need not be delivered solely through variable pay or incentive remuneration. There’s the so-called “tournament model” where performance incentives are delivered through career value and the competition of employees to advance up the career hierarchy;  the “efficiency wage” model where premium pay is offered coupled with a “credible threat” of termination for those who don’t deliver to performance standards;  and the “bonding model” emphasizing back loading of pay and benefits or steep trajectories of total remuneration as a means to test and motivate employees to perform well.

These models are drawn from economics research that speaks to the advantages and disadvantages of each model and the specific contexts in which each model is most likely to be effective. Of course, there may be constraints specific to each organisation that take one or more of these alternatives off the table, but it’s still useful to bring this perspective to the evaluation of any pay for performance system. It permits the organization to consider how important contextual factors affect how specific rewards are likely to play out in their environment. It can help optimize incentive designs and anticipate and avoid negative unintended consequences of proposed changes.

So a good remuneration consult will keep that spreadsheet current, but he or she will also understand and track the even more complex interactions in the real world that provide the context and influence the success of their remuneration programs.