Practice Network:
On the Wisdom of Rewarding A, While Hoping for A
(And I have Waited 15 Years to Use This Title!)
Michael M. Harris
University of Missouri-St. Louis
I have always wondered why I-O psychologists seem to avoid the topic of pay.
And although I have long suspected that I-O psychologists in industry and
consulting generally do not get much involved in pay issues, an examination of
the SIOP annual Membership Directory confirmed that suspicion. While some
I-O psychologists in industry and consulting list "performance
appraisal" as an area of interest, very few list
"compensation-benefits-reward systems." It struck me that there are at
least two peculiarities about this state of affairs. First, there is a huge body
of literature on performance managementbut I-O psychologists have conducted
relatively little research on pay. Second, I-O psychologists have written a lot
about motivation and I suspect it would be the unusual I-O psychologist who
would argue that motivation is not a major factor in understanding human
behavior at work. Yet, I-O psychologists seem to have relatively little to say
about pay. Of course, if you believe that money is not a motivator, then perhaps
the relative lack of involvement by I-O psychologists in the compensation and
pay area is quite reasonable.
Given all of these ruminations, I decided to learn more about performance
measurement and pay systems. In order to locate I-O psychologists to talk with
me, I examined the most recent SIOP annual Membership Directory and
searched for individuals who might be appropriate to talk with about performance
measurement and pay systems. I made contact with five respondents. Here are the
questions I asked my respondents:
1. What new, innovative, or cutting-edge performance measurement and pay
systems are being used at your company?
2. What are the major barriers or challenges to these systems that your
company has experienced?
3. What key contributions can I-O psychologists make in this area?
New Approaches to Performance Measurement and Pay Systems
The answers that I received varied in terms of the degree of innovation and
emphasis. One of my respondents, for example, described the use of the company
intranet to provide a "toolkit" for managers giving feedback to
subordinates. In addition to offering steps and tips for conducting the meeting,
the intranet site provides potential reasons for performance problems and Web
links to solutions (e.g., training classes in business skills). Thus, at this
organization, the major innovation is the creation of an intranet site to help
managers improve performance. This organization has moved away from numerical
ratings of performance and focuses on a narrative approach to performance
measurement. The reward system has both a merit component that addresses base
pay (which is determined by a combination of market factors and performance) and
an incentive component that addresses pay-for-performance (which is a one-time
bonus based on performance).
At the other end of the spectrum, one of my respondents described the
implementation of a highly quantitative, individual incentive. Originally
focusing on the technicians, the system was subsequently offered at the
managerial level as well, in order to ensure that all employees are working
together. Employees are able to track their performance on the company's
intranet and payouts are given quarterly. Interestingly, employees' base pay was
cut when the system was implemented, but employees have the potential to far
exceed what they otherwise would have earned. According to this respondent, one
advantage of the new system is that the company was forced to consider and
explicitly communicate what performance is desired. To relate to the title of
this column, I have always believed that a major strength of a well-designed
incentive system is that it forces management to decide whether it is hoping for
A, B, or C.
While the two approaches described above focused on the individual level, one
of my respondents described a pay-for-performance system that provides stock
options for all employees. Most employees receive 50 shares of company
stock each year, which vest in 3 years. The key purpose of the program is to
enable employees to feel like owners. Obviously, there is no direct performance
measurement system involved here, because every employee is entitled to the
stock options. This organization does, however, use a 360-degree feedback
system, which is primarily aimed at employee development. This system includes
an intervention program for managers who attain very low ratings.
The most integrated performance measurement-pay system focuses on the
alignment of objectives. The process of developing objectives starts at the top
of the organization, with the annual generation of operating objectives, which
ultimately cascade down to each individual employee. According to this
respondent, the alignment of objectives between individuals, departments, and
the organization is critical in this process. Each employee develops, with input
from the supervisor, a set of objectives, along with behavioral expectations,
and a developmental plan. When the time comes to make pay decisions, the
employee's supervisor reviews the objectives, along with the behavioral
expectations associated with each objective. Managers rate each employee on a
5-point scale, indicating the degree to which the objectives have been met. A
pool of money is set aside, based on the organization's overall performance,
which is then distributed by the managers to each of their employees, depending
on their rating. One particularly interesting aspect of the system is that the
objectives, or goals, must be met in accordance with the behavioral
expectations. In other words, it's not just whether you achieved the goal; it's
also how you achieved the goal. As an example, you might meet production
targets, but if you upset your employees in the process, you may have failed to
achieve the goal.
Finally, another respondent works for an organization that has developed
software to help organizations achieve the kind of integration described in the
previous paragraph. In the words of the respondent:
In companies where employees are connected to the Internet, each employee can
have an "account" within an online PM [performance management] system.
At the beginning of a performance period, employees can log on and see the
competencies that apply to them and document the goals they've agreed to with
their managers. Throughout the performance period, they can update their
objectives (which have a habit of changing within a few weeks of being set),
note the progress they are making against each objective, and note any resource
needs or obstacles. Managers can access their subordinates' accounts, keep up to
date on their progress, and see where help or additional resources might be
needed. They can also keep ongoing performance notes pertaining to each
employee, for coaching and developmental purposes.
This respondent noted that another advantage of this system is that it
enables managers and employees to maintain an ongoing exchange regarding
performance and can even include an e-mail reminder to the participants that
they have not interacted recently with the system. Another major advantage is
that the CEO or any other high level manager can look at performance across
levels or units and determine progress at any point during the timeframe. Even
though an organization may have thousands of employees working on thousands of
goals, this system would enable a CEO to get instant summaries regarding
progress on goals and objectives. The CEO could then pinpoint what goals are in
trouble and what goals are being met and could then work on addressing the
problem areas.
In sum, organizations are trying a variety of different systems to tighten
the link between performance and pay. It would have been interesting, but beyond
the scope of my conversations, to try to learn what the factors were that led an
organization to use one type of system over another system.
Major Barriers or Challenges to These Systems
I categorized the answers I received here into four groups:
Limited infrastructure: Implementing a performance
measurement-pay system may require use of an intranet, which in turn assumes
that the organization has the necessary hardware, software, and technical
expertise. Even for organizations not using an intranet-based system, some of
these performance measurement-pay systems require extensive administrative
support.
Employee resistance: One respondent indicated that HRM staff
are frequently complacent about implementing new performance measurement-pay
systems because they view the new system as the "flavor of the day,"
destined to join the garbage heap with last year's "new" system. (This
respondent also made an interesting analogy between completing performance
evaluation forms and completing tax forms_which leads me [this is an original,
folks] to think of a joke:
Question: What's the difference between completing a tax form and
filling out a performance evaluation form?
Answer: When you complete your tax form, you may get something in
return!
(And, yes, my wife says my jokes are terrible.) Alternatively, employees may
resist the new systems because they don't trust management to be fair or because
they have a sense of entitlement.
Value of the reward: A problem I have always thought about in
regard to pay-for-performance systems is the value of the reward. This came up
in some discussions with respondents as well. Essentially, when times are good,
many of these programs will provide a fairly large amount of money. But what
happens when company profits are poor and the value of the reward is small or
perhaps nonexistent? One of my respondents indicated that the solution is for
managers to continually focus employees on the "long-term," rather
than on the "short-term," mindset. I liked that answer, but I sure
don't envy the managers trying to maintain that perspective.
Managerial skills: For those organizations that use a more
subjective performance measurement system, managerial skill in assessing
performance remains important. And of course, because feedback plays a role in
almost any organization, the lack of managerial skill can undermine the
performance management process.
In sum, it is clear that any performance measurement-pay system faces
formidable barriers and challenges. But isn't that just the thing that keeps I-O
psychologists employed? By way of analogy, if people never became ill, what
would doctors do for a living?
Key Contributions That I-O Psychologists Can Make in this Area
As a preface, I think it is reasonable to state that my respondents generally
did not appear to perceive the I-O psychologist as playing the leading role in
designing and implementing performance measurement-pay systems. Rather, the I-O
psychologist was viewed as support staff. This position fits, I think, with my
introductory comments about I-O psychology and compensation issues. Given that
the I-O psychologist is playing a support role, then, what precisely can we
contribute in this area? Most of the responses I received were based on a fairly
traditional view of our role. For example, the I-O psychologist would help in
defining relevant behaviors and competencies. The I-O psychologist could also
contribute in the area of training and education, such as helping managers
become more effective in measuring performance and providing feedback. Another
respondent addressed the role of ensuring that technologically driven systems
(e.g., intranet-driven systems) are based on good judgment and sound
professional practice. Perhaps the most novel response came from a respondent
who said that the key contribution of the I-O psychologist is to help make
performance management a "naturally occurring process." What I think
this means is that the I-O psychologist should strive to make performance
management a logical process, which serves business needs and fits within the
assigned purpose. I really like the expression this respondent used (a
"naturally occurring process") and would be interested to hear how
"Practice Network" readers feel about this term! What additional
contributions do you think I-O psychologists can make here?
Well, I'm about out of space, so I will end this column with a small
variation on the usual "boilerplate" material: As always, please,
continue to contact me with reactions to this column. As for future topics, I
have no idea what I will write about next. Hopefully, I will have an inspiring
thought in the next few months. If not, I will call a friend who is creative and
beg him or her to help meThat person could be you! Also, I like to hear from
people like you. You can contact me about the Internet, Cubs baseball, theology,
or bourbon whiskey. I have interests in all of the above, especially the last
one (oh, yeah, and in I-O psychology, too). Please e-mail me at mharris@umsl.edu,
call (314-516-6280), fax (314-516-6420), or snail-mail me, Michael Harris,
School of Business Administration, University of Missouri-St. Louis, St. Louis,
MO 63121.
I would like to thank the following individuals for their help in preparing
this column: Lisa Collings, US West; Leslie Joyce, GlaxoWellcome,
Inc; Lynn Summers, Performaworks, Inc.; Alan Walker, First
Tennessee Bank; Paul Walker, Southern Company.
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