More Companies Adopt a Pay-for-Performance Program

i4cp study: Performance management is undergoing a change as companies drop forced-ranking system in favor of alternative methods

SEATTLE, WA (May 18, 2009) - The "automatic raise" days are history, according to a recent study by the Institute for Corporate Productivity (i4cp) showing that companies are paying closer attention to their pay-for-performance systems.

The study found that, overall, 78% of polled companies say they tie pay to performance (that rises to 84% in companies with 10,000 or more employees), with most of the focus squarely on the solid performers. In fact, more than half (54%) offer no merit raises at all to low performers. However, the study also revealed that most organizations offer only slightly higher merit raises to their high performers than to their average performers. The most common raise for average performers was between 3% and 4%, while for high performers it was between 4% and 5%.

And, organizations are watching over the process. Overall, 71% of companies say senior management is holding managers accountable for their rating accuracy, and 73% provide training for those who determine performance rates.

"Companies are becoming more willing to withhold merit raises for poor performers, but in general they are still not truly distinguishing the top performers from the average," says i4cp research analyst David Wentworth. "This could be due to a fear of creating a perception of unfairness when they are trying to find the fine line between the good and the very good. In this economy, where reductions in force are the norm, companies are really focused on how they treat the surviving employees."

When it comes to selecting just how employees are ranked as high, middle or low performers, company methods stray from the historic norms. Just 21% use "forced distribution" systems, which tie performance ratings to fixed standards, and only 17% utilize "forced ranking," which compares workers with each other in order to create a scale. Instead, almost half - 46% - use alternative methods to create differentiation between high and low performers.

The study also found that cash is king regarding rewards for performance. Overall, 69% of respondents provide a salary increase, compared with a 74% in large organizations, and 64% of all companies offer a one-time cash bonus (72% in large companies) as reward. Stock options are used by 24% of large companies, as opposed to 14% of all polled firms. The "pat on the back" non-monetary perks are less popular, with just 14% of companies reporting non-cash rewards as an option.

Current economic conditions also play a role in the equation. Of companies polled overall, 44% say the economic situation has made their pay-for-performance system a higher priority, while almost half (49%) of large companies say that today's economic doldrums have raised the priority of their merit-pay programs.

The Pay-for-Performance Pulse Survey was conducted by i4cp in March of 2009. A total of 511 respondents participated in the study. The full results of the survey are available exclusively for all i4cp corporate members.

About i4cp, inc.

i4cp is the world's largest vendor-free network of corporations focused on improving workforce productivity. Our vendor-free community facilitates innovation by giving our members - among the largest and most respected organizations in the world - access to:
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Erik Samdahl
Erik is the head of marketing at i4cp, and has nearly 20 years in the market research and human capital research industry.