Performance-Based Pay and Employee Engagement

Friday, July 05, 2013

A recent study (Kelly Global Workforce Index) by Kelly Services, a workforce and staffing solutions company, indicated that employees prefer compensation based on job performance. The study reported that for those employees not on a pay-for-performance system, 40% of respondents indicated they “would be more productive if they had their earnings linked to performance/productivity outcomes”. Steve Armstrong, Sr VP/GM for Kelly’s U.S. Operations was quoted as saying, “the trend reflects widespread recognition that organizations and individuals are most productive when their interests, including incentive-based pay, are aligned”.

Employee pay-for-performance systems are most effective when employees’ interests align with the organization’s business goals and objectives. In an April 26, 2013 report on Gallup's Employee Engagement Index, Daniela Yu, Jim Harter, and Sangeeta Agrawal found that U.S. managers had the highest (36% vs. 26% in 2009) level of employee engagement. The lowest level of engagement was attributed to “Manufacturing or production workers” at 24%. Equally, significant, the report clearly shows an increase in engagement for all worker classifications between 2009 and 2012. While at 36%, even the highest engagement level is well below an acceptable level, nevertheless, a 10-percentage point improvement over 2009 is certainly significant. The authors attributed this increase in manager engagement, in part, due to an increase in their organization’s new hire activities and thus an “improved view of the hiring situation at work”. By extension, a worker’s increase in engagement correlates with an improvement in their organization’s “hiring situation”, i.e., workers feel more secure about their future prospects.

Towers Watson, a professional services company, reports that organizations often struggle to show a relationship between performance-based compensation programs and employee engagement. In a 2013 white paper titled, “Using Targeted Incentives to Drive Sustainable Engagement”, Towers suggests the linkage between reward and engagement is related to; “… behaviors that organizations can promote via incentive plans [which] are limited only by their ability to observe, measure and communicate …” This clearly relates to the axiom, “If you can’t measure it, you can’t manage it.” Towers goes on to define engagement as, “… discretionary effort in order to achieve work-related goals.”

While it may be apparent, it bears restating, employee engagement behavior resides at the upper bounds of employee performance levels. In other words, employees must stretch their performance to achieve engagement. Merely reporting for work will not achieve employee engagement. Kathy Orr, Principal, Orr & Associates, has described this process as “rasing the bar” of employee performance expectations and hence employee engagement. Employees may not want to hear it, but the performance and engagement levels they delivered last year, may not be acceptable this year. For performance-base pay to be effective at engaging employees, organizational leaders must design reward and recognition systems, which drive the work behaviors of more than 36% to 24% of workers.