Think Pay for Performance Will Go Away? Well, Think Again... - 16 Oct 2009

By Ann Bares:

There's been much web-based discussion of late about pay for performance and incentives (the Dan Pink video controversy and
recent WorldatWork community debates to name just a few).  These
debates have prompted a number of HR and reward professionals to
question whether performance based rewards really work or whether,
perhaps, they should be relegated to the dustbin in favor of a more
enlightened worldview.

My position is essentially this:  If you think the link between
performance and rewards is going to go away any time soon, especially
as we move into the new post-recession reality, you'd better think
again.  One of the (many) reasons why is that business operations
overall, particularly customer-supplier relationships, appear to be
trending strongly in that direction.

An article Pay for What You Get: Putting Performance-Based Contracting to the Test
in this week's issue of Knowledge@ Wharton discusses recent
"breakthrough" evidence, reported by researchers at Yale University's
School of Management, of the power of performance-based contracting.

A little background from the article:

PBC -- also known as performance-based logistics (PBL) or power by
the hour (PBH) in some circles -- isn't new, though its use has been
limited. Often associated with maintenance agreements at aerospace and
defense companies, it was first embraced by the likes of U.K.-based
aircraft engine manufacturer Rolls-Royce some 30 years ago.

But under pressure to cut costs and improve efficiency, others have
hopped on the bandwagon more recently. A case in point: the United
States Defense Department, which has required widespread adoption of
PBC for new military equipment since 2004. More companies should follow
suit. The reason? According to its proponents, PBC is the most
economical way to cover the maintenance costs of big-ticket items like
F-22 fighter jets and commercial airplanes. They add that PBC increases
the reliability of these items by decreasing the number of major
repairs they need.

There's other good news for cost-conscious companies. With PBC, it's easier to keep a lid on overall capital expenditure.

(More about the topic and this trend can also be learned from an earlier Wharton article Power by the Hour: Can Paying Only for Performance Redefine How Products are Sold and Serviced)

At its essence, this trend represents an effort to align
incentives between suppliers and their customers.  Based on the results
of their study, Yale researcher and professor Morris A. Cohen predicts
that PBC could dramatically change how customers and suppliers work
together.  Which could mean a dramatic change coming down the pipe for
organizations that provide products and services to other businesses,
ultimately raising the bar for how they measure, manage and reward
performance.  And, by logical extension, for how they measure, manage
and reward the efforts of their workers.

One of the most popular justifications raised for
abandoning pay for performance is that we do such a lousy job of it.  I
can't argue that there isn't an element of truth there; we certainly
have lots of room for improvement.  Lots.  But that doesn't mean it
isn't right and necessary. Given the current economic climate and the
likelihood that our organizations will, indeed, be asked to link their
income to performance, we have a clear imperative to take the steps
necessary to do better.

That's what I think.  You?