Is Your Organization Ready for Pay for Performance?

Barbara Bucklin, PhD

bSci21 Contributing Writer

As someone who’s studied, researched, and implemented pay-for-performance systems over the past two decades, I’m encouraged by the number of Health and Human Service agencies starting to use pay for performance in their organizations.

Because of my experience, I want to share lessons learned about organizational readiness. If an organization isn’t ready, the system can be ineffective at best and detrimental at worst. Prior to implementing a system like this, I recommend the conditions outlined below.

But before we get to readiness, first I want to explain the pay-for-performance system that I’m referring to, because there can be many different arrangements between performance and pay. It’s based on one designed by the late William Abernathy, described in his book Pay for Profit: Designing an Organization-Wide Performance-Based Compensation System (2011). This is a system with balanced scorecards across the organization, department, and individual levels.

The payout formula considers both the organization’s profit as well as the individual’s performance, which eliminates problems of paying high wages to employees when the organization is experiencing cash flow or profitability shortages.

The scorecards set expectations for employee behavior and accomplishments, across balanced measures for each job role, such as revenue, cash flow, expenses, quality, productivity, regulatory compliance, and customer service. Monetary incentives are delivered contingent upon achieving a weighted combination of these measures. This type of monetary incentive system is consistent with individual monetary incentive research in the OBM literature, much of which has been conducted from the 1980s to today by Dr. Alyce Dickinson and her lab. I was lucky enough be part of her lab in the late 1990s and early 2000s (Dickinson, 2005).

Conditions for Pay for Performance Readiness

Executive and Management Readiness

• Executive and senior leaders need to spend time identifying organizational-level results aligned with their business strategies. This will take their time, energy, and oversight from the start. Ongoing, it’s important for them to use scorecards as tools to discuss and provide consequences for department and individual performance; they must ‘own’ the scorecards. It won’t be successful unless they’re committed to this system as new way of managing performance across all levels of their organization.

Sharing return-on-investment data can help executive leaders ‘buy in’ to pay-for-performance scorecards. Anecdotally, I’m aware of Health and Human service organizations that have implemented similar scorecard structures have seen improvements of up to 20% in measures such as employee retention and contract fulfillment.

• Manager and supervisor buy-in is also crucial. For many organizations, this type of system changes the behaviors required by managers and supervisors, which may be time consuming and aversive at first. It’s up to executive leaders to create and deliver positive consequences for their managers and supervisors, contingent on engaging in those new behaviors. This is especially true at the beginning when requirements change, more work is involved, and pay isn’t yet attached to the scorecard results (i.e., design, development, and baseline phases). As with any change initiative, overtime managers and supervisors will experience the benefits (i.e., natural positive consequences) of their scorecard-related management activities.

Performance Measures/Data Collection Systems 

• For scorecards to function most effectively, the organization must have IT systems in place to collect data and populate scorecards. When scorecards rely on too much manual data collection and analysis, they become cumbersome and overly aversive. This type of IT system can be, and typically is, purchased or created during the pay-for-performance system design.
• Ideally the organization should have a portal for sharing scorecard results ‘at a glance.’ This can be integrated with the IT data collection system described above. The more frequently and easily employees and their managers or supervisors can view current scorecard data, the more effective the program will be. Your system won’t work if delays are too long between the behavior and when employees see their scores and/or earn payouts. With a portal, employees can immediately see scores that bridge the gap between behavior and payout. This could be simple Excel spreadsheets housed on an intranet, or a more complex system such as QuickScore (https://balancedscorecards.com).
• Managers need time allocated to complete or review (in the case of automated scorecards) their department and employees’ weekly, monthly, and/or quarterly scorecards, and provide feedback to their employees based on results.

Program Design and Implementation Resources

• In the most successful pay-for-performance scorecard systems, the organization identifies a program champion to serve as a single point of contact. This person will be able to answer questions and provide support. He or she must have access to the IT system(s) and scorecard data. External consultants are just that, external. While I recommend partnering with expert consultants to design and test scorecards, they can be expensive, are typically involved for a limited engagement, and aren’t available around the clock to help. A consultant can train the program champion and ultimately transition the system oversight to him or her. The program champion is often someone in a quality control, training and development, or human resources role.
• Enough time needs to be planned to fully design, implement, and test the scorecard system and measures (i.e., collect baseline data) prior to attaching it to performance-based pay. If employees don’t see the measures and related payouts as fair and balanced, and something they have control over, you’re likely to experience problems inside your organization. When you pilot test and collect baseline data, you should gather frequent feedback from employees in every department and revise the measures as appropriate.
• The organization should be financially stable. While ultimately pay-for-performance scorecards produce impressive returns on investment in quality, productivity, customer service, employee retention, etc. that all contribute to financial health, if your organization can’t afford the initial payouts, employees and their managers won’t access contingent performance pay and your return on investment will be much lower. As I mentioned earlier, the system I recommend considers both organizational profit and individual performance for payouts.

Expectations

• In successful pay-for-performance scorecard systems, organizations set clear expectations with managers and employees about what’s required of them and any added time and work commitments related to collecting, reviewing, and reporting scorecard data. These expectations are set before baseline data are collected.
• If managers and supervisors will be collaborating with a program champion and/or data analyst, those relationship should be made explicit. They should be given instructions about who to go to for what answers.
• Managers, supervisors, and employees need to understand how the overall system, and individual scorecard measures, align with the organization’s goals and strategies. Communicate this regularly and with transparency.
• Per the Executive and Management Readiness section above, it’s important for executive leaders to deliver ongoing feedback to managers and supervisors about their participation in the program. This includes reviewing scorecards with managers/supervisors and following up on how they share data with employees.

Frequent, Contingent Consequences and Incentives

This condition may sound strange, given that pay-for-performance scorecard systems ARE monetary incentives; however, other consequences and incentives should be considered as well.

• It’s important for executive leaders to provide relief from activities occurring in participants’ jobs that could compete with successful work on scorecards. This is particularly true in the beginning.
• As mentioned earlier, in successful scorecard systems, executive leaders provide social recognition and praise to managers and supervisors when they successfully use scorecards to manage their teams. This is also important during the program baseline, before monetary payouts are available.

Readiness Checklist

Check all of the following boxes before you embark on a pay-for-performance scorecard system in your organization.

• Our executive leaders report that they see value in pay-for-performance scorecards, and they expect a return on their scorecard investment.
• Our executive leaders have time to focus on identifying organizational strategies with which the scorecards will be tied.
• Positive consequences will be available for managers and supervisors who engage in scorecard design, development, and baseline data collection for their departments and employees.
• Our organization has IT systems and a portal in place to collect, report, analyze, and share scorecard data, OR we have a plan/budget to purchase or create IT system(s).
• We’ve identified an internal program champion to serve as a single point of contact to answer questions and provide support related to pay-for-performance scorecards.
• We plan to take the time necessary to fully design, test, and analyze the scorecard system prior to delivering pay based on scorecard results.
• Our organization is financially stable.
• We have, or plan to, set clear expectations about the time and work commitments, across the organization, necessary to make the program a success.
• We will communicate regularly about how the scorecard system aligns with the organization’s goals and strategies.
• Executive leaders are prepared to deliver ongoing social recognition to managers and supervisors based on their successful participation in the program.
• Our organization is prepared to re-structure managerial and supervisory job duties, as necessary, to remove contingencies that compete with scorecard-related activities.

As always, I’m here to help if you have questions about your readiness for a pay-for-performance system. You can reach out to me at [email protected]

Have you used pay for performance in your organization?  We want to hear about it in the comments below!  Also be sure to subscribe to bSci21 via email to receive the latest articles directly to your inbox!  You can also learn about more OBM and other topics, while earning CEUs in our on-demand video series.

References

Abernathy, W.B. (2011). Pay for profit: Designing an organization-wide performance-based compensation system. Atlanta, GA: Performance Management Publications.

Dickinson, A.M. (2005). Are we motivated by money? Some results from the laboratory. Performance Improvement, 44(2), 18-24.