Is pay for performance right for your organization?

Today’s nonprofits face several challenges that are forcing them to operate more and more like their business counterparts. Competition for dollars coupled with demands for accountability has caused nonprofits to reevaluate the way they do business. As nonprofits struggle to pay their executive directors more, one of the business practices they are being asked to consider is a pay-for-performance program.

Simply put, a pay-for-performance program—also known as merit pay— is one in which an employee’s pay is based on work performance and demonstrated results. Employees who contribute more receive a higher salary or “merit” increase. This system assumes that job performance can be observed and measured accurately.

The theory behind pay-for-performance is that rewards and bonuses motivate employees to do their jobs better. While there are several advantages to pay-for-performance systems–including acknowledging, with dollars, exceptional employees—there are also many pitfalls.

In theory, the idea sounds perfect: Employees will work harder and more efficiently if they are given more money or other rewards for hitting certain goals. Employees also like the idea of being able to demonstrate their abilities and reach, if not surpass, their goals. In practice, however, the process of connecting pay to performance is trickier than it seems.

Leading writer on the subject of money as a motivator, Alfie Kohn’s Punished by Rewards (Houghton Mifflin) says that rewards may actually damage quality and productivity and cause employees to lose interest in their jobs. Why? Among other reasons, Kohn says, rewards create competitiveness among
employees and undermine collaboration and teamwork. In addition, rewards reduce risk taking, creativity and innovation, because employees will be less likely to think outside the box if doing so jeopardizes their chances for a reward.

If you are considering a pay-for–performance system, here are some questions to consider:

What is your compensation philosophy?

What does your organization value in terms of what and how it wants to pay employees? Your philosophy should support and be compatible with the organization’s specific pay objectives, long-term strategy and overall mission.

Many nonprofits pay below market wages, meaning that an employee performing the same tasks and with the same amount of experience could potentially earn more in the same job in the for-profit sector. Nonprofits usually balance this with more generous leave packages and the chance to work in a mission-rich environment. In some nonprofits, linking certain performance objectives and pay increases to such measurables as the number of constituents served or to the financial health of the organization may give a boost to the executive director’s base salary level, thus equalizing his or her pay to the market.

What message do you want to send?

Pay-for-performance programs usually reward individual performance. However, the organization of many nonprofits is an open, collaborative environment where work gets done through a group effort. Instituting a system that rewards individuals rather than the whole may be a hard sell—and may work against the organizational spirit. If you link pay to performance, make sure that individual job duties are assessed with pay linked to those tasks.

Can you really do this?

An organization contemplating moving to a pay-for-performance system should think through a couple of issues.

First and foremost is the organization’s ability to pay. In general, eight to 10 percent of the budget salary line should be set aside for merit increases. Can your organization afford to do this?

Next, your organization must identify those job duties that can be observed and measured and which are of enough value to build into the merit increase. Measurables can include such goals as increasing dues-paying clients or services and products offered, or reducing customer complaints and errors. Harder to measure is how passionate employees are about the organization or how much they live the organization’s vision and mission. Finally, look at the structure of your organization—pay-for-performance systems work well in hierarchical organizations where each role builds to the job above it.

What rewards do you offer besides money?

There are other ways to reward those employees whose work you value besides giving them more money. Good compensation packages include superior leave options, including vacation and sick leave, as well as health and medical coverage that is as generous as the budget allows. Incentives can also include resources to support the executive director to attend professional conferences or to sit on national boards. And a bonus at the end of a financially successful year is always a strong motivator.

No matter what choice is made on how to pay employees, especially the executive director, make sure that those doing their jobs know what is expected of them. Clearly state job expectations and set realistic performance goals to accomplish those tasks. If an employee isn’t performing as expected, give feedback and give it immediately. If an employee is performing, celebrate that employee’s success.

See also:

Fired Up or Burned Out

Nine Minutes on Monday

Zilch: The Power of Zero in Business

Image credits: bigeducationape.com, fcw.com, punishedbyrewards.com, newsystemthinking.com

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