…So this morning I was perusing Mercer’s website when I came across an intriguing piece looking at why companies implement their pay for performance schemes, and how they can make them more effective. This is a really good read, and you can check it out here.
With that said, the primary reason I’m sharing today’s post is because I wanted to write about an alternative pay-for-performance model discussed in the piece. Used by approximately 14% of survey respondents, the model is summarized below:
In a promotion-focused or “tournament” model, pay varies significantly from one career level to the next, with less emphasis on differentiation based on performance between employees at the same level. In this model, competition for advancement, rather than the size of the base pay increase or annual incentive, is what motivates employees to perform well. The best performers earn more via promotions based on relative performance evaluation. About 14% of those in the 2013 survey reported using this type of model.
This definitely got me thinking: Could a “tournament-styled” pay model like the one described above really be applied to an entire workforce? After all, there are only so many promotions available at each level… which means an organization employing such a pay-for-performance model is failing to recognize a healthy segment of its top performers on a year-over-year basis. The dominant pay for performance model – with its yearly merit budget spread more or less evenly across the entire population with slightly larger increases for the highest performers – has existed for so long partially because it provides recognition for its key continuity players (e.g. the segment of the workforce that isn’t likely to progress farther up the corporate ladder, but nonetheless adds significant value in their roles). It could be argued that merit pay has become an entitlement… but to that point removing it or heavily scaling it back would probably cause significant engagement issues with some of the people key to organizational success.
I also think such a model broadly applied could have some negative cultural implications, creating a less collaborative / more adversarial workforce. It would also likely attract talent with an ‘up or out’ mindset… which isn’t necessarily a bad thing – a certain percentage of every workforce should think this way – but a big part of driving continued operational excellence is ensuring a certain segment of the top performers in one’s workforce has deep subject matter expertise (and contentment) in their roles – and sometimes that means limited advancement.
…Still, according to the survey 14% of companies are using the model. Ergo, it must be effective somewhere outside of a consulting shop context.
If your company utilizes a similar model please share your thoughts/comments on why it works (or doesn’t) below.