Paying for performance

‘You can't manage what you can't measure’ is an adage that has been around since forever. One of the most common, and increasingly controversial, manifestations of a connection between measurement and management, is performance-related pay (PRP).

It's not a new concept. Ever since ancient Mesopotamians were paid by the basket for picking olives, there's been some variation of incentive pay. In the modern day the term is used fairly loosely with commissions and bonuses often thrown into the definition.

The general understanding of PRP is money paid to someone relating to how well he or she works. Business theorist Frederick Winslow Taylor was a great supporter of this method of payment, believing money was the main incentive for increased productivity.

Other proponents say PRP provides a direct incentive for employees to achieve a defined work target and, as their contribution is recognised through a tangible reward, motivation and commitment improve, directly influencing overall productivity and performance.

But a fundamental criticism relates to the subjective nature of performance and suggests the performance of a complex job as a whole is reduced to a simple, often single measure of performance.

Criteria for call centre staff, for example, may be the length of a phone call, however this fails to take into consideration quality of help given and whether the caller's problem had been rectified.

Macroscopic factors such as an economic downturn may also make employees appear to be performing at a lower standard, independent of actual performance. In other cases, opposition is motivated by hostilities which can arise when times of low turnover sees multiple employees vying for the attention of one customer, and when more than one employee assists one customer.

Robert Half New Zealand general manager, Megan Alexander says performance pay can work in a variety of different industries, including retail.

"It can be very morale boosting. You need to understand employees' needs and that means talking to them. You need to understand everyone is different. The hardest thing is getting a platform pay structure that tailors to everyone's needs."

There are some keys to integrating a successful performance pay structure, she says. "The key is expectation management, communication and clarifying to people why they are not getting bonuses or why they are. Make them aware and accountable."

While she says people need to take into consideration the business' financial capabilities, money isn't everything. "It can be a lot more simple than people think - it could be allowances for mobile phones, through to the employee not being penalised to look after a sick child," she says.

"Pay is not always the main driver of people's happiness. Yes, people need to feel rewarded and recognised, but performance pay doesn't solve everything.

"It's a combination of culture, strategic vision, communication - performance pay is only one way of keeping people happy."

Latest statistics from Robert Half International's 2010 Salary Survey suggest that while not as high as our Asian compatriats in performance pay, New Zealand is still in line with Australia. Of the Kiwi respondents, 39 percent said they received a bonus in 2009, compared with 36 percent in Australia, 56 percent in Hong Kong, 64 percent in Japan and 75 percent in Singapore.

Of the New Zealanders, 42 percent said they did not receive a bonus, with 19 percent saying bonuses are not part of their salary package. This year, 38 percent of New Zealand respondents said they are expecting to receive a bonus, on par with Australia; both below the average of 54 percent. Half the Kiwi respondents do not expect to receive a bonus in 2010.

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