What do you get when you pay people to perform?
Many organisations today are looking to increase their bottom line by paying their people to improve individual performance. Do such policies really work? Are there any downsides?
I recently read a disturbing report in the daily newspaper about an air crash in Indonesia. The article (in the Sydney Morning Herald, 12/4/07) read in part; “Pilot may have been saving fuel in crash.
A Garuda policy of preserving fuel may have been why a pilot did not abort a landing in Yogyakarta last month that killed 21 people, the head of the airline’s pilots association said. He was concerned about Garuda’s policy of paying pilots a 3 per cent bonus if they conserved fuel. The company is making extra payments to pilots if they can conserve fuel. Maybe this is bothering the pilots.”
Not only is this a disturbing safety concern, for me this also raises the issue of individual pay for performance. Individual pay for performance is contrary to teamwork and ultimately, organisational effectiveness. If everyone is out to “do their own thing”, the consequences must surely lead to lack of consideration of others and ignoring the use of their expertise.
Elsewhere in the article, it was mentioned that the report suggested that the pilot continued to land rather than abort despite the urging of his co pilot and the airplane’s warning alarm system to abort the landing.
Many organisations today are looking to increase their bottom line by paying their people to improve individual performance. For instance, it is now quite common for a large percentage of a person’s salary (particularly senior managers) to be based on their performance, with a smaller component made up of base salary.
Why do organisations continue to throw money at performance issues? My contention is that if organisations were better managed and led, then there would not be the need to offer people incentives to perform.
Contrast this “pay for performance” approach with another article in the same paper headed “Smilers are stayers”. The article described a small pharmaceutical company, Blackmores, that had just been given a Best Employer Award. Their secret? They look to the long term development of their people, encourage them to take responsibility, reward them with good salaries, and include them in a company wide profit sharing scheme. As one Blackmores employee, Pamela Stone said “There’s a culture of openness and genuine support and honesty which keeps people motivated”.
Performance pay is now almost a part of the standard makeup of organisations, particularly in western countries. So, can it be improved to increase employee effectiveness, teamwork and organisational effectiveness? Fortunately, there is a set of principles. Many successful organisations take the following approach:
- Base salary - relative to industry standards (the major component of salary)
- Profit sharing – inclusion in a company wide profit sharing scheme
- Team performance – inclusion in a team based performance scheme
- Individual performance – achievement of personal objectives (smallest component of salary)
Does this approach work?
One of the largest and most successful pharmaceutical companies in the world, uses these principles. For example, their base salaries (which make up the largest component of pay, approximately 85%) are amongst the best in the industry. Of the remaining 15% component of salary, 40% relates to company profit, 30% to team performance and 30% to individual performance. But over and above salary, they manage their people really well – people enjoy working for the company as evidenced by the lowest staff turnover rate in the industry.
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