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Aug 26, 2013

A lot of the debate surrounding pay for performance focuses on the degree to which differentating pay by an individual’s performance serves as an incentive, encouraging the employee to focus energy and attention on achieving the things necessary for the organization’s success.

In other words, do we get what we pay for?

What we overlook, however, is the more macro impact that performance pay can have on the overall composition of an employer’s workforce.

A link between performance, pay, and turnover

Research tells us that both low and high performers are generally more likely to leave an organization than are average performers. Research further confirms that organizational practices can influence the performance distribution of those who leave, and that turnover of high performers is particularly sensitive to the pay-for-performance link.

In other words, a strong link between performance and pay tends to reduce the turnover of high performers and increase the turnover of low performers, while a weak or nonexistent link tends to produce the opposite effect.

In fact, the specific study that I described in a post last week at the Compensation Cafe and here at TLNT (Is There Real Value in Paying for Employee Performance?) examined the costs and value creation associated with four years of movement in and out of an organization’s workforce by different levels of performers and estimated that an investment in an aggressive pay for performance link could deliver as much as a 16 percent increase in economic value.

You get what you pay for, and who you pay for

And this analysis — from what I could discern — doesn’t even address the possibility that adding a dimension of competency/skill attainment to a performance pay plan might deliver even more value by driving a shift in the skills and abilities of the workforce … an increasingly urgent issue for many companies.

All evidence suggesting that we need to broaden our understanding of what performance pay can truly deliver in today’s world — and the reality that you not only get what you pay for, but ultimately, who you pay for as well.

This was originally published on Ann Bares’ Compensation Force blog.

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