Pay-for-Performance Plans and Why They Don’t Always Work

As payroll budgets remain tight, it may seem logical to offer pay for performance bonuses as an incentive for employees to stay motivated. But data shows that the plans rarely work as expected. Dave Logan from CBS News has recently highlighted a handful of mistakes companies often commit when using incentives. The four primary ways he identified incentive programs as going wrong include: offering incentives for tasks workers believe they can’t do, punishing everyone for program abuses by the few, and incentivizing work that employees feel infringe upon their values.

Incentivizing tasks perceived to be impossible isn’t likely to work well because the real problem leading to the need for such a program is not found within the realm of employee effort but in the fact that a company’s product or service does not fit well with the needs of the market. The burden that such an incentive plan places on employees (that is, to perform better when they are already performing at their peak) will lead quickly to decreased morale and higher turnover.

Since each employee responds differently to changes in his or her environment, it should be expected that some employees won’t respond in the same way to an incentive plan as do most of their colleagues. Instead of restructuring an entire program to suit the needs of a few underperformers, it is much better to focus on coaching the lagging performers on how to take better advantage of the incentive. Otherwise, the majority of staff who are performing fine under the original program will become unhappy.

Developing incentive programs that require employees to perform activities that skirt the law, even if no one will be hurt, may affect the quality of services, and an eventual drop in customer satisfaction. And once that dissatisfaction returns to haunt employees, their morale will be affected and productivity will suffer.