Tips on How to Move to a Pay for Performance Pay Plan.

By Jim Fox and Bruce Lawson, Fox Lawson & Associates, A Division of Gallagher Benefit Services, Inc.


Question: “In a recent CompDoctor™ you said that some public agencies are successfully moving to pay for performance systems. You also said that the shift requires more of a focus on cultural issues than on the design of the pay system. But you guys are comp guys, right? ‘Cultural issues’ sounds more like an organizational development issue. If the success of pay for performance in the public sector is more about a shift in culture, how do we do that? What recommendations do you have for preparing our culture for a move to pay for performance? Oh, and we’d like to make the change in the next six months. Is that possible?”

CompDoctorTM: Great question. Actually a fabulous question! We only wish we had an answer! Just kidding. If you have read our articles before, you know we have an answer for just about everything…at least as it relates to compensation issues. Actually, we are getting more and more calls from clients wanting to revise their performance evaluation systems, or simply develop them from nothing. They are all asking about pay for performance. In most cases they have very little clue about what they are getting into and have not even begun to consider the cultural, manager and employee shifts that will be required. Oh, and of course, they too want it to be effective in six months time (or in some cases, if you can believe it, even less!).

Now is the time for a reality check. Because unless you see the process laid out, you and your elected officials, board members, boss, or what have you, will think that if you can’t get it done in six months, you are not focusing your attention in the critical areas.

Let us go through a process that we think you ought to take, regardless of where you think you are in the pay for performance development cycle. We are going to start at ground zero, so if you already have something in place, you can skip over some of these steps, because you apparently have already gotten over these hurdles. On the other hand, if you are not so sure, it is always a good idea to start from the beginning and get it right. We are going to deal with this like a procedure manual, knowing full well that with anything that affects humans and pay, such a systematic way of proceeding is just plain naďve. But, like Don Quixote, onward we will go, completely blind to such truth.

Step One: Are You Ready?

We think that you ought to engage in a readiness assessment before you go any further in your progress toward pay for performance. This is a short questionnaire (about 15 questions) that can be administered to all employees and then the results tabulated. The results will be enlightening, and in our experience, will tell you what areas you need to work on in order to be ready for a pay for performance program, which we’ll call “P4P.”

The questionnaire highlights areas of organizational commitment, supervisor support, purpose, trust and other issues. In our experience, if the scores come back indicating that the organization is not ready for P4P, then moving to the next step is simply foolish and a waste of time and money. As we once told a city council, they wanted a highly tuned sports car (our analogy at the time was a Jaguar), when the kids didn’t even know how to drive. Once they understood the situation, the concluded that maybe a Ford Focus might be a better choice (at least at the outset) so that they could actually learn to drive, bang up the car a bit and then move on to something more sophisticated when they were better prepared.

An adaptation of this is to get small groups of employees and supervisors together to discuss the results of the survey and identify an action plan for resolving some of the issues.

Step Two: What Are the Necessary Success Criteria?

Just knowing that you are ready may not be enough. There are also aspects that you may need to understand a bit more. So, in keeping with that theme, here is a quick list of questions that you should be able to have answers to before you take the next step, whether you are ready or not.

1. Do you have top management support? (That includes leadership plus the board/council members.)

2. Does the organizational culture accept change?

3. Have you developed an idea of how you will link pay and performance and also address cost of living issues?

4. Do you have a viable salary increase budget? (Well, who does these days, but our research shows that while more is better, the difference in effectiveness of a program, with one percent of payroll dollars and five percent of payroll dollars, is insignificant. Hard to believe isn’t it?)

5. Do you have an effective performance management system? (Even a lousy one is better than none at all, because at least you have partial building blocks in place.)

6. Do supervisors and subordinates trust each other? (This is one of those make-or-break items. You might want to enroll in “trust worthiness school” if morale is in the dumps because of ineffective supervisors. Poor supervisors will sink you every time. Our best advice is to fix it.)

7. Are there measurable differences in performance in the jobs that you are focusing on? If not, then a P4P program may not be very effective. (Frankly, some jobs are either done or not, and there is little difference in performance that can be measured. Think airplane pilot; what does unacceptable performance look like?)

8. Do your managers have the ability and willingness to distinguish differences in performance? (If they think all their employees are wonderful and then some random week, they want to fire them, you have a problem that needs fixing.)

9. Is your pay structure competitive and fair? (If you don’t have a solid foundation, P4P is not going to fix it, and could make it much worse.)

10. Do you effectively communicate with employees? (If not now, when do you think it would be a good idea?)

11. Do you have the administrative resources to track and administer a program that will require about as much effort every year (if not more) than open enrollment?

12. Do you have a policy manual that you can incorporate a P4P philosophy into? (While more than a few words, the board should agree to the statement.)

13. Will there be consequences for managers who don’t want to go along with the changes? (One bad apple that is not held accountable by top management is just as important to the program as a solid compensation program. Without this, your chances of succeeding are minimal.)

As you can see, this is quite a list. And, do you notice that of the 13 items, only two have anything to do with compensation? All the rest have to do with cultural and organizational development issues.

Step Three: How Is Your Pay Strategy?

OK, let’s say that you are ready and have passed all the tests. You have looked at Step Two and are ready to go. When can we implement? Slow down. We are far from the finish line.

Do you have a pay strategy that is clear and incorporates P4P? We didn’t think so. Most public sector organizations (about 70 percent) have a pay strategy, but about 95 percent of them do not incorporate P4P. A pay strategy is a statement(s) of the intent and approach that you will take in compensating your employees. Part of that approach is why P4P is such a big issue. Is it to retain top quality employees? What are you going to do with poorly performing ones then? Do you want to reward employees based on their contribution to the success of the organization, department, and/or work unit? Then you need to define what success looks like and again what you will do if an employee is not making the expected contribution to success. This needs to not only be thought out but spelled out. We doubt that it can be stated in one or two sentences in a short pay strategy statement. So, you may need to engage the board and top management in a rather intense discussion about why you pay employees what you pay them. The answer to that question is not found in an hour-long lunch meeting.

Step Four: What Do You Want To Reward?

This may sound like a stupid question, and it certainly is very directly related to the above step, but you need to answer this clearly. Just to help you out, here are a few things that we have found that organizations want to reward:

  • Individual performance

  • Team performance

  • Performance improvement

  • Increasing capacity or competency/skills

  • Education

  • Personal/professional development

  • Interesting isn’t it? If you are in a college or educational environment, professional development and educational attainment are highly valued and are usually items they want to reward. Does that work for you? Or maybe team performance would be very important to a road maintenance unit, but not so to a housing inspector. The point is, it can be a combination of these things or it can be just one of them. You have to decide which ones and how much. And, different departments may have different things that they want to reward. No one can give your organization the formula that works for you. You have to find it yourself. How is that lunch meeting working for you now?

    Step Five: Is Performance Management the Same as P4P?

    Wait! Isn’t pay for performance just the natural outcome of performance management? Well, yes, it could be, but for many it is not. Frequently we ask our clients if they have a performance evaluation system in place. Most of them say yes. Then we ask if they pay based on performance. The answers are interesting.

    Some say yes and some say no. (Well really guys, what other choices are there?) Those who say yes then follow up with saying that if employees don’t receive a “satisfactory” performance rating, then they don’t get a step increase or a COLA. When asked how many don’t receive one of those kinds of increases because of an unsatisfactory performance, they state that they can’t remember anyone who didn’t get an increase!

    If this is the case, then you may have a form and performance criteria, but you don’t have a very effective performance management system. You need one. And to have one, you need these things (see Step Two):

    1. Measurable differences in performance in the jobs that you are focusing on.

    2. Managers who have the ability and willingness to distinguish between different levels of performance. If you have these, then you have a lot, but if not, you need to immerse your managers in a bit of training. To be honest though, some managers can be fixed and others can’t. You need to figure out what to do with the latter.

    Step Six: How Is Your Training?

    If you are this far, you are in good shape. Not much more to go. When we asked our good friend, performance evaluation expert Marnie Green, of Management Education Group Inc., what cultural issues she thought were important, she came back with this answer: TRAIN, TRAIN, TRAIN!

    We don’t think she was talking about light rail. Nope, she basically yelled in our ears telling us that mangers must have the skills to give specific feedback to employees and to clearly convey their expectations for what “good” performance looks like. This is the tough love of management. If you can’t tell an employee that they messed up or did a good job, maybe you ought to find another line of work. Because effective managers can get a lot out of people, but they need to be honest, and sometimes that means that you need to tell employees that they did not meet your expectations.

    The difficulty in most organizations is that work groups are social groups. Managers and supervisors may have been promoted into their jobs and they view their subordinates as their friends. Think about parents who simply want to be friends with their kids—we don’t need to tell you the consequences that could result from that type of parenting.

    Step Seven: Where Are Your Employees?

    Most managers and elected officials we talk to think that performance evaluation is the responsibility of the managers. It is something managers do to employees at the end of the year.

    Wrong answer. If your performance management process does not significantly involve the employee, then you are destined to fail. Back to Ms. Green; after she yelled in our ears, she said this:

    “And, employees need the skill to fully participate in the management of their own performance.”

    What that says to us is that employees need to be trained as well. After all, they need to be an integral part of the process. They need to evaluate their own performance and be on par with the managers when they talk about performance expectations. When you treat the employees as an equal part of the process, you break down mistrust and the feeling that it is a subjective process where only the ones who are liked by the boss get raises.

    Step Eight: Do You Hold Managers Accountable?

    Part of being an effective manager, and one of the criteria for a manager’s performance evaluation, is if they have found differences in performance of their subordinates and they have had the willingness to clearly communicate these differences to employees. If you don’t have this, find a way to get it.

    Step Nine: Have You Linked Pay with Performance?

    Even if you don’t have much money to play with, you need to find a metric to link pay and performance so that the top performers get more than the ones who are not top performers. This can be through a set-aside bonus amount, a link based on placement in range and performance (merit matrix) or a percent pay increase factor. Regardless, it needs to be established and understood.

    Step Ten: Did You Tell Them How It Worked?

    Ms. Green goes on: Communicate the results of the program so that staff as well as elected officials can see the impact that focusing on performance has on the organization. Use these data to maintain the funding support for the board and possibly enlist union leaders, if you have unions.

    Step Eleven: Repeat

    P4P programs need to evolve. In fact, in our experience, once you set this up, you will do rather poorly the first year. You will evaluate more people as exceeding expectations than should be (one county we heard of had 93 percent of their workforce “exceeding expectations”!), you will set easily achievable goals, or you will define performance expectations poorly. Do not be dismayed. The next year you will be better, and the third year you will be pretty good. By then you will want to revise the program! And we think you should.

    So, back to your question. As you can see, this is mostly cultural, organizational and employee development. But, if you don’t have the essential underpinnings, you can have the most elegant merit matrix or bonus plan and great funding support and it will fall on its face. And you said you wanted this in six months? Really?

    So, as Don Quixote said: “Ah, ah, now I understand you, Sancho! Oh yes, lots of times, and I feel it coming right now. Get me out of this pickle, because it's already pretty messy in here!”