The Future of Pay for Performance: Can the Membership Model Work?

Photo illustration by Dreamstime
Photo illustration by Dreamstime

In their session on the next generation of pay for performance at last month’s WorldatWork Total Rewards conference in San Diego, Mercer consultants Brian Levine PhD and Haig Nalbantian presented the case that companies have overstepped in their move to variable pay during the downturn, as they have worked to leverage limited resources to the greatest productive advantage, and that – given employees’ strong preference for base pay as a reward – we should return to more salary-centric model of compensation.

With this, they proposed two “alternative” pay for performance models (which focus on base pay as the primary reward) for our consideration:

The “Tournament” Model

  • Pay rates need only vary with hierarchical level, not current performance.
  • Pay rates in levels above motivate those below.
  • Relative performance evaluation determines who advances.

The “Membership” Model

  • Pay rates exceed market.
  • Partial monitoring, supervision is difficult.
  • Employment discontinued when employee found not to meet threshold performance.

I haven’t yet given great consideration to the tournament model; that may be the topic of a future post. On the surface of it, though, it strikes me as an approach which relies on the existence of substantial organizational and pay level hierarchy to have any motivational power. Many of today’s flatter, leaner organizations may not have the number of striations and upward growth slots required to make this approach ultimately effective.

Membership Model doesn’t rely on incentives

For this post, however, I wanted to take a closer look at the membership model. Interestingly, although he doesn’t call it by this name, this is the pay model that Dan Pink advocates when he advises us, rather than relying overly on incentives, to:

  1. Pay people enough to take the issue of money off the table; and,
  2. Pay people fairly.

The membership model, in the words of the Mercer team, can motivate if premium pay – as a substitute for direct supervision – is coupled with threat of termination.

Call me vision-impaired, but I get stuck when I try to envision above-market pay as a substitute for supervision. Particularly because I suspect that little supervision also means little performance management, direction or coaching. Does this approach rest, then, on the assumption that employees who are “purchased” at a higher salary level – by definition – innately understand the link between company strategy and priorities and their own role … and can be turned loose to collaborate and generate success on the required terms, without “interference” by leadership?

A heavy move to more performance management

To my way of thinking, the membership model must rest heavily on performance management – perhaps even more so than other approaches. How else do we ensure that our high investment in talent delivers value for us? And how else do we reliably, decisively, accurately and compassionately identify and terminate those individuals who aren’t delivering on that investment? After all, the threat of termination is the cornerstone of this approach, is it not? Otherwise, don’t you risk simply building an overpaid and entitled workforce?

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In what I can’t help seeing as a particularly ironic note, it often seems as though many of the calls for this model of compensation – the cries of “just pay them fairly!” crowd – come from the same group who insists that performance appraisals must be killed off.

Perhaps it ultimately hangs on what you see as the end goal. The Mercer consultants reference employee turnover (or its reduction) as a key measure of reward plan success. For sure, premium pay will likely reduce employee turnover. I would argue that business results are at least as important a goal as reduced turnover; in the end, a successful and economically viable organization is in the best position to serve everyone’s interests – owners, leaders and employees.

Help me here. What’s your take? Does the membership model represent the best “next generation” of pay for performance? Is it truly workable and, if so, for what kinds of organizations? Where are we seeing it work effectively now and what have been the conditions for its success?

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

Ann Bares is the Managing Partner of Altura Consulting Group. She has over 20 years of experience consulting in compensation and performance management and has worked with a variety of organizations in auditing, designing and implementing executive compensation plans, base salary structures, variable and incentive compensation programs, sales compensation programs, and performance management systems.

Her clients have included public and privately held businesses, both for-profit and not-for-profit organizations, early stage entrepreneurial organizations and larger established companies. Ann also teaches at the University of Minnesota and Concordia University.

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