The Popularity of Pay-for-Performance Plans

Younger generations of workers say they are more inclined to participate in pay-for-performance compensation plans than their predecessors. Such arrangements can create a "powerful bond" between companies and workers, but research indicates such plans can have unintended consequences in some instances.

By Michael O'Brien

New research finds a divide between younger and older generations on the topic of pay-for-performance compensation plans. More Generation X and Generation Y workers are saying they are compensated via pay-for-performance-based plans, compared to baby boomers.

More than four in 10 (43 percent) Gen Y workers and about the same (42 percent) number of Gen X workers are currently on pay-for-performance plans at work, compared to only 30 percent of baby boomers, according to 13,000 U.S. workers surveyed by Troy, Mich.-based Kelly Services in its fourth annual Global Workforce Index.

More than half of the Americans (61 percent) surveyed say they would be more productive at work if they had a greater interest in the companies that employ them, through benefits such as profit-sharing.

The global acceptance of such plans is about the same -- with 65 percent of respondents in the Asia Pacific region and 56 percent of Europeans saying that profit-sharing or an ownership stake would motivate them to perform more productively. (The survey polled a total of 134,000 workers worldwide, but the global findings were not broken down into age or gender groups.)

"There is a high degree of interest from employees in having a portion of their compensation tied to the financial performance of their employers," says Mike Webster, executive vice president and general manager of Kelly Services.

Kelly Services Executive Vice President and Chief Operating Officer George Corona adds that "profit-sharing and company-ownership arrangements create a powerful bond between workers and employers, and can motivate people to be more productive and creative."

Webster says the reason for the generational divide on the issue of pay-for-performance plans is simple.

"They think differently than I would, as a baby boomer," he says. "They want to be more in control. They come [into a new job] with more self confidence" and decreased expectations about how long they will remain with the company.

"For example, when younger workers latch on with a new company, they don't want to be there for 30 years, like their parents did," he says. "They are simply there for the experience.

"They don't believe that they have to pay their dues," he adds, saying that younger workers typically believe they will perform in an above-average way right from the get-go, and that mind-set "fits right into a variable-based pay model."

In addition to the generational divide, the research also found that men (30 percent) are more likely than women (23 percent) to engage in a pay-for-performance plan.

Webster says men have "historically have been more competitive" and been able to negotiate incentives, whereas women are more drawn to job flexibility instead of compensation.

"As more companies start to explore this type of compensation, I expect it to be more balanced" in terms of participation by gender, Webster says. "Companies now in the middle ranks are starting to explore more programs like pay-for-performance."

So what does all this mean for HR executives?

Jodi Beggs, a researcher in the field of behavioral economics and incentives who focuses specifically on when, if and how incentive schemes work, says the jury is still out on whether pay-for-performance compensation plans will someday be the norm.

"The high-level summary of academic findings is that pay-for-performance can work in some contexts and with certain types of work, but can have unintended consequences and even lead to lower performance in others," says Beggs, who is based in the Boston area.

To wit, the Kelly's research notes that pay-for-performance plans are more prevalent in financial services, travel and leisure, retail and business services as opposed to other industries.

"I don't necessarily disagree with the survey finding that some employees would be in favor of pay-for-performance systems in their workplaces," she says, "but they certainly aren't the silver bullets that they are sometimes made out to be."

But Webster says the survey points to an increasing demand for such programs in the future, which means that organizations must improve their pay-for-performance programs today.

"We have to get better at designing these programs," he says. "They just can't be too complicated, because part of the issue that companies have had historically with such programs is that they've made them too complicated and no one understands them or how they work."

He says that some organizations' programs may include "too many measures, some that may even counter each other" when it comes time to determine actual compensation.

"You have to put not only clear measurement, but also objective measurement, into the program" so the workers can understand where they are at various timeframes and to know whether they are progressing at an acceptable rate.

"These new generations don't deal in gray areas well," he says. "They're much more cut and dried in their thinking."

The best pay-for-performance plans also should offer "a lot of clarity to the work that needs to be done," he says. "It forces management to be clear about job objectives and the expectations for the particular assignment, and that's a positive trend because it lends clarity all the way back through the system."

But Cleveland-based author and organizational expert Ted Sun says pay-for-performance plans can backfire on organizations for one simple reason.

"One can always ask the ethical question: 'Why should you pay someone extra for doing their job to the best of their abilities?' " he says.

Despite this, Webster says future compensation models will be a reflection of the workers they serve, and the new generations in the workplace these days are re-evaluating everything.

"This new generation doesn't think the old way," Webster says, "and they don't thrive in the old environment either."