Does Your Company Use a Pay-for-Performance Program?

Ever since the financial crash in September, many employees have seen the prospect of a raise vanish as their companies attempt to keep costs under control. Even when brighter days return, though, not all will be seeing a boost to their pay check.

According to a recent study by i4cp, performance management is undergoing a change as companies drop force-ranking systems in favor of alternate methods, most notably pay-for-performance programs. 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.

How does your company tie pay to performance?

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.

Merit increases and performance metrics, what percentage increase is there?

Being a high performer pays off, slightly

So, this is good news for high-performing employees, right? Yes, but only to an extent. More than half of companies offer no merit raises at all to low performers, but 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%.

Selection methods are transforming

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.

So, the question is: does the pay-for-performance model lead to improve productivity engagement, as high performers see themselves as rewarded for their work and low performers either become more motivated or move on?

See the preliminary results of i4cp's pay-for-performance study (requires free registration).
Erik Samdahl
Erik is the head of marketing at i4cp, and has nearly 20 years in the market research and human capital research industry.