HR 434 Compensation Management
23 February 2012

Pay for Performance What better way to drive people to work harder and more efficiently, you may ask, than to offer them a special carrot: more money for hitting specific company targets? The idea seems perfect. Studies have shown time and again that pay represents one of the most important factors involved in retaining qualified employees, it is little wonder that there has been a great deal of attention focused on how best to compensate employees for their performance in recent years. Moreover, because employee performance and productivity is inextricably related to organizational profitability, these issues have assumed new relevance and importance in the current economic
It is important to design compensation systems to emphasize long-term job attractiveness to employees and to avoid performance-related pay that crowds out intrinsic motivations associated with public service and valuing the work itself. One could also make the point that some of the studies to date concerning pay-for-performance in the private sector fails to provide the desired outcomes (i.e., improved employee performance) and that in the area of public service arena, such initiatives can actually be detrimental to employee job commitment and motivation. Indeed, simply implementing such an initiative is one of the fundamental stumbling blocks that quickly emerges from the relevant literature. According to Lavy, “Implementing performance-based pay requires meeting the daunting challenge of devising a system for measuring performance. The system must measure true performance in a way that minimizes random variation, as well as undesired and unintended consequences. It must align performance with ultimate outcomes and monitor performance to discourage cheating” (p. 88). In fact, Lavy suggests that any initial incentive pay program implementation will likely be flawed in some ways, but gradual progress in achieving a