NEW YORK – Gone are the days when commissions and bonuses are the failsafe mechanisms for incentivizing employee productivity. As job duties become increasingly wide-ranging, so too does the need to design compensation packages that correspond to the needs of a changing, global market. According to Ann Bartel, Merrill Lynch Professor of Workforce Transformation at Columbia Business School, companies that want to remain competitive should adopt multidimensional performance evaluations that consider a wider range of performance metrics where appropriate. In other words, one size no longer fits all when it comes to pay.
"Employers often use performance-based pay to align employees’ interests with firm goals, but designing such a compensation plan is challenging because performance is typically multifaceted," Bartel explains.
Bartel lays out the nuances of pay-for-performance plans in a paper, published by IZA World of Labor. While many previous studies have pointed to the benefits that pay-for-performance systems have on productivity, the paper details a multitasking or "you get what you pay for" problem, which arises when a performance pay plan only rewards employees for a subset of their actual job duties.
The Multitasking Problem in Pay-for-Performance
A classic example of the traditional pay-for-performance problem is a sales employee, who might be incentivized to sell the company’s product based on the promise of a commission. In this case, by focusing solely on the sale at hand, there’s no metric, and no way to reward the salesperson according to the quality of the product or the customer service experience, potentially resulting in negative short-term feedback and long-term impacts on profit.
A more recent example is President Trump’s proposal to slow the frequency of regular step increases for federal employees, and instead creating pay incentives to reward and retain "high performers" with performance-based raises. While this approach can work successfully in some contexts, it can become a serious problem when job duties combine tasks that are easy to measure with tasks that are hard to measure.
But the multitasking problem doesn’t only exist on the sales floor or within the federal government. For instance, elementary school teachers often have two main tasks in the classroom: making sure their students are at grade-level and that they are engaging and inspiring students to learn. While the former is relatively easy to measure, the latter is nearly impossible. In this example, firms should carefully consider whether it might be in fact more profitable to forego incentive-based rewards because of the risk that staff will ignore the hard-to-measure tasks altogether.
Bartel, along with co-authors Brianna Cardiff-Hicks and Kathryn Shaw, also studied the effects of the problem in the legal profession. In "Incentives for Lawyers: Moving Away from 'Eat What You Kill'," the researchers found that partners were focusing their efforts on billable hours and not spending sufficient time on leadership activities to build the firm. When compensation was changed to provide greater incentives for leadership activities, such as presenting at conferences, attending firm meetings, and training and mentoring associates, the partners significantly increased their non-billable hours and shifted billable hours to other team members. While law firms have historically relied on billable hours to compensate their partners, today, fewer than 10% of firms rely on this approach exclusively.
Moving Beyond a One-Size-Fits-All Approach to Pay-for-Performance
Scaling a pay-for-performance system where multiple elements of job performance are being evaluated can be beneficial, but requires experienced managers to oversee the evaluation process. Even then, complex compensation plans may be difficult for employees to understand. Therefore, for knowledge workers (e.g. managers, software engineers, scientists, lawyers, physicians, and academics), pay-for-performance compensation may not be appropriate, and companies may instead choose to devote a larger share of the compensation package to a fixed salary, but either way, today’s marketplace requires a more nuanced understanding of worker responsibilities and a more thoughtful indicator of job performance.
To be competitive in the marketplace, employers should consider the following recommendations when structuring pay-for-performance plans: Measure and reward all job duties in order to ensure employees are not ignoring those duties for which there is no existing metric. Provide training to help employees understand the metrics in more comprehensive compensation plans. Be aware that for knowledge jobs with more emphasis on non-routine problem solving, pay for performance may not be the best reward system. Use subjective performance evaluations to reward hard-to-measure tasks (e.g. teamwork).
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.
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