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Nov 8, 2011

If you like cash money but not necessarily being forced ranked to get it, there’s some good news for you in the latest i4cp report on performance pay practices.

The survey shows that the use of pay-for-performance in salary increases and annual bonuses has increased 17 points in the last two years to 90 percent among organizations.

The use of forced ranking and distribution models in performance management has gone the opposite way. Both have had their usage drop to under 10 percent of organizations.

Let’s take a closer look at these numbers and some of the other results from the survey.

High performing companies reasoning differs

If pay-for-performance is used by 90 percent of companies, you might think that the reasons they use it are similar to one another. And while common sense would seem to be the obvious choice here, there seems to be many different reasons why employers choose to use a performance-based pay model.

Overwhelmingly, high performing organizations chose pay-for-performance models to primarily recognize and reward high performers. Lower performing organizations chose pay-for-performance to increase the likelihood of achieving corporate goals (recognizing high performers was a close second place). There’s a very nuanced difference between the two strategies.

If you choose to use a pay-for-performance model, you should be looking at influencing individual results, not trying to drive some larger, more obtuse, corporate goal in the process. One of the lessons that seems to have been lost in the last recession is that your best performing employees are still paying attention.

When they are still doing well at their job and the company chooses not to reward them for their effort because of a missed corporate goal, they pay attention to that. Because pay-for-performance in that scenario means, “If we’re doing good, then we’ll figure out if you’re doing good and if we feel good enough, we’ll pay you.”

That’s not a compelling offer.

More high performing organizations differences

A couple more notes from the survey:

  • 37 percent of high performing organizations feel that their pay-for-performance is effective at improving individual performance in comparison to less than half that amount (16 percent) at their lower performing counterparts. What’s interesting to me is that the number is still so low overall. Even as a retention program, a good pay-for-performance system is worth it’s money.
  • High-performing organizations are almost twice as likely to give a 7 percent or more merit increase and much more likely to award 150 percent or more of annual bonus targets than lower performing companies. Not surprising if you remember the high-performing organization’s reasons. If you believe that pay-for-performance should be primarily for rewarding your top performers, it makes sense that those organizations would go through the efforts to make sure they do just that.

But probably more welcoming news came from another part of the survey.

Forced rank and distribution be gone

I was glad to read that forced ranking and distribution had dropped to single digit percentage usage. Those who know me know there is no love lost between force rank performance programs and myself.

What may have been an okay idea for one company was translated without much thought to hundreds of respected organizations. There was no contemplation about what forced ranking does to culture or performance, just some thinking that following that management fad would lead to GE-like performance.

What used to be used at nearly a quarter of companies two years ago has now dropped to under 10 percent for both practices. When the practice drops even further by 2013, I think we’ll be a lot better off for it.