U.S. Office of Personnel Management - Ensuring the Federal Government has an effective civilian workforce

Pay for Performance: Your Performance Management Program Is the Foundation

"The organizations that do indeed truly reward people consistently for performance outperform those that don't. My sense is, if you're not going to pay for performance, what are you going to pay for?"

Jay Schuster, a partner in Schuster-Zingheim and Associates, Inc.

A pay-for-performance system is only as successful as the performance management program on which it depends. "Pay for performance" refers to any compensation system that links pay and performance. The concept of basing pay on performance is not new. Ever since the ancient Mesopotamians were paid by the basket for picking olives, there has been some form of pay for performance.

The two most common general categories of pay for performance are merit pay and variable pay.

Merit pay links pay to individual performance that is consistent with the mission of the organization. The type of performance evaluation most often associated with merit pay plans are appraisals that focus on individual performance and typically use a combination of quantitative and qualitative performance elements.
Variable pay is usually a lump-sum payment, contingent on results. Variable pay is usually dependent on employee or organizational performance, or both.

As generally accepted by researchers, a well-planned pay-for-performance system can work in an organization with the appropriate appraisal program and performance culture. A primary driver of the success of a pay-for-performance system is the ability to distinguish among levels of performance. Organizations with successful pay-for-performance systems share the following characteristics:

• They have a strong, performance-based culture with an effective performance management program in place. Management establishes clear expectations and measures that make meaningful distinctions across levels of performance and reinforce accountability.
• They develop effective communication processes along with high levels of trust and understanding among employees and management. Managers view performance management as an ongoing process of communication. They focus on helping employees achieve their best.
• They have managers who are willing to make honest and objective assessments of their employees. These supervisors create measurable and observable elements and standards and then use them in appraising employees.
• They put a strong emphasis on education and training. Managers and supervisors are trained in performance assessment and are skilled at setting clearly defined expectations and monitoring employee performance.

In an ideal program, employees participate in the performance management process. Employees help supervisors design and develop performance plans. This helps employees understand the goals of the organization, what needs to be done, why it needs to be done, and how well it should be done. It also helps employees see how they contribute to the organization's mission, goals, and success. Employee participation reinforces the message to employees that good performance is important to organizational success.

Agencies need to open lines of communication and dialog to establish a framework for the possibilities of making pay distinctions based on performance. Linking pay to performance will inevitably focus agency and employee attention on performance management. This should create a strong incentive for agencies to improve how they measure and manage performance.

April 2007