Why Pay Should Be Based on Performance

If you search this question on the internet, you might be surprised with what you get back. There is a robust discussion of whether paying employees differentially based on their performance always has the result of getting better performance . But don’t get confused. For the most part, this debate is specifically tied to those individuals where their pay is based on sales and commissions. And the heart of that debate is two-fold. As with everything, there can be a dark side – cheating the system to make more money. And there are legitimate questions of whether pay for performance affects employee engagement, stress, etc.

When we (my colleague Debra Logan and I) talk about paying women equitably to men we are referring to their base pay + any bonuses that are given to the business unit or organization based on company performance. Why are we restricting our discussion to just these? It’s for two reasons. First, if we include sales and commissions, then when we get to the remediation strategies we would get into some strange spaces. If women are not able to make the amount of sales and commissions as their male counterparts that requires different strategies to resolve than we are addressing here. And second, commission formulas can get complex very quickly when you start adding in accelerators for example. The modeling gets complex. And again, the remediation strategies are different than we would recommend if there was role to role pay inequity. Thus, we will “kick the can” on this part of the “pay for performance” debate.

So What Do We Mean When We Say “Pay for Performance”

While it is easy to agree that pay should be based on performance (after stripping out the just discussed scenario), the challenging question is assessing performance. And assessing performance in a way that can be modeled in an analysis. That means we have to quantify performance in some way. The simplest way is to use a numerical representation of the annual performance rating. So if your organization uses a five point scale for performance – outstanding, exceptional, satisfaction, below average or improvement required – you can translate those into numbers. You can assign 5 for outstanding down to a 1 for improvement required. The cost of this method is that you lose the richness around the performance. Two employees can both be rated a 5 , but that does not mean that their performance was equal to each other. What you gain in using this approach is that it is very easy to see patterns in performance. A women that has had successive years of high ratings should see that translate into greater pay compared to male peers that have had years of successful ratings.

And there is the heart of Gartner’s EPIC program … all things being equal, women should be paid commensurate with their performance in their role and if their performance is equal to a male counterparts, then they should be paid equally.

Stay tuned because in two weeks I will explore the qualifying phrase in that last sentence … “all things being equal”. What are those aspects of working (we call them variables) that can also predict pay?

Continue to follow my colleague Debra Logan and I on the topic of pay equity. We celebrate #choosetochallenge as the theme for Women’s History Month. In this blog, I chose to challenge the question of pay for performance.