Embracing Pay-for-Performance

Author's Note: This article is the third in a series presenting techniques that institutions can use to build a stronger performance culture and to link rewards—monetary and otherwise—to employee performance. An uncomfortable silence covers the room as the president of the university utters the phrase “pay-for-performance” as a priority for the coming year. The senior leadership team members look at each other, unsure of what to say next. Then, the room erupts with questions: Can this program work without sacrificing collegiality? Do supervisors and managers have the right skills and tools to evaluate performance appropriately? How will goals be set and tracked? How can we ensure consistent use of ratings? In truth, these are all good questions to raise. In order to create an effective and sustainable pay-for-performance culture and program, institution leaders will need to address each of these issues and more.
	Karen Hutcheson
	Carolyn Wong

For the past several years, we have been hearing rumblings from academic leaders about building a stronger performance culture and developing compensation programs that appropriately link pay and performance. And yet, there has been reluctance to introduce something that has such a “corporate” feel to it. That hesitancy is quickly evaporating. The recent economic downturn has made clear that this concept is suitable not only for for-profit organizations, but also for colleges and universities of all types and sizes where it is essential that everyone be working toward common objectives and performing in accordance with growing expectations.

To understand the current state of pay-for-performance in higher education, Sibson Consulting conducted a “Higher Education Pay-for-Performance Survey” this past summer. Since pay-for-performance is a relatively new concept within academia, we were not sure what kind of response we would get. In total, 76 institutions responded, reflecting a variety of institution types and sizes, as shown below.

Approximately half of the institutions surveyed indicated that they currently have a pay-for-performance program in place, with another 20 percent saying they plan to develop one. These findings are encouraging, as institutions appear to be rethinking how their rewards link with employee performance. On the other hand, about two thirds of the institutions with a program stated it was only marginally effective. That signals that there is significant work to be done to raise the bar on these programs and increase their effectiveness.

Execution is Key

A strong pay-for-performance program is one that is well understood, with well-trained managers who are held accountable for results, and with leaders who support and model effective planning, coaching, and evaluation. Although 91 percent of participants surveyed believed they have a strong performance-management program in place, poor execution may be to blame for overall ineffectiveness. Ultimately, the key to success for any pay-for-performance program is execution. A program can be simple and straightforward and yield excellent results if it is executed well. Unfortunately, many employers focus more attention on program design than on execution. For example, only 28 percent of institutions surveyed have clear performance differentiation (see Figure 1).

FIGURE 1
DOES YOUR INSTITUTION CURRENTLY HAVE A PERFORMANCE MANAGEMENT PROGRAM?	IF YES, PLEASE CHECK THE COMPONENTS THAT APPLY
n = 76	n = 69

Without clear performance differentiation, you can’t easily target rewards to high performers. If high performers aren’t recognized, whether through pay or other rewards and incentives, this can ultimately lead to lowered morale, increased frustration, distrust in management, and loss of key talent. In our consulting practice, we hear time and again how frustrated high performers are when lower performers are rated and paid at similar levels.

Additionally, institutions must have a system for ensuring that core expectations, ratings, and pay standards are consistently administered across the institution. This can be done through the use of various tools and processes and through regular monitoring. However, this requires commitment by all employees, particularly senior leaders, supervisors, and managers. Specifically, supervisors and managers need extensive and comprehensive training to ensure they understand the performance-management system and know how to develop goals and enforce expectations, how to use ratings, and how to link performance with pay. Our survey found that only 29 percent of institutions have such a system in place, while another 32 percent plan to implement one. Interestingly, 75 percent of the independent institutions surveyed report that they either have or plan to implement this type of system compared to only 45 percent of public institutions.

Finally, a strong pay-for-performance system should take into account not only base salary or merit increases, but other types of rewards. Among survey participants, there was an even split when asked if they used rewards aside from base salary (45 percent indicating yes and 54 percent indicating no). For those that do, additional rewards included incentive or performance bonuses and spot bonuses, with spot bonuses provided most frequently to non-exempt and exempt employees (see Figure 2).

FIGURE 2
ASIDE FROM BASE SALARY, DO YOU USE OTHER REWARDS?	REWARD VEHICLES (ASIDE FROM BASE SALARY) BY EMPLOYEE LEVEL:
n = 76	n = 35

With limited funds these days, institutions must become even more creative with instilling value in their pay-for-performance program components. For instance, nonmonetary rewards can include opportunities to get involved in projects and committees that help individuals build additional skills and competencies as well as gain exposure to others across the campus.

Winning Attributes

An institution’s specific circumstances, talent profile, and reward philosophy will most certainly drive the structure of its pay-for-performance program. Regardless of the particular program design, some universal attributes can help ensure success.

1. Leadership and management buy-in and support. Institution leaders, supervisors, and managers alike must champion a pay-for-performance program, take responsibility for enforcing the program’s core principles and processes, and take ownership for executing the program and holding each other accountable.
2. Alignment of goals. Alignment of individual, departmental, and institutionwide goals creates line of sight and fosters employee engagement. Keep in mind that goals must be controllable, measurable, and strategic.
3. Consistent performance standards and evaluation. A performance management system with clear, standard criteria and managers who can evaluate their employees consistently against those criteria helps create performance differentiation, a critical component of an effective pay-for-performance program.
4. Clear line-of-sight relationship between performance and rewards. Determine and communicate in advance to employees what the payment or increase will be if certain performance expectations are met. Ideally, establish target, threshold, and maximum reward levels associated with specific achievements.
5. Management training. Institutions should plan to conduct substantive management training on how to develop goals and enforce expectations, use ratings and calibrate performance, conduct performance conversations and provide performance feedback, and link performance with pay. This knowledge is key for ensuring consistency of the program across the institution.

We fully expect that performance management will remain in the forefront of discussions taking place on college and university campuses in the near future. It is important to bear in mind that it takes time for a pay-for-performance program to take hold and become fully effective. In addition to your focus on program design, recognize the need to explain the program, train everyone, and be persistent and consistent with program execution. By proactively taking these steps, institutions can ensure a sustainable program with the capacity to meet future challenges, attract and retain the best talent, and encourage new and innovative thinking to further the strategic objectives of the institution.

Karen Hutcheson is a senior vice president at Sibson Consulting and a co-leader of Sibson's higher education practice. She specializes in consulting to colleges and universities in areas of compensation, performance management, and HR assessments. E-mail: khutcheson@sibson.com.

Carolyn Wong is a consultant at Sibson Consulting and a member of Sibson’s higher education practice. She specializes in consulting to corporations and college and universities in areas of compensation assessment and design, and performance management. E-mail: cwong@sibson.com.