Performance-Based Pay Plans are Fraught with Problems

Many companies feel that their variable-pay programs are costing more than they bring in, according to a Hewitt Associates study, which compared companies with single-digit revenue growth to those with double-digit revenue growth.

The problem is apparently that some companies spend too little on these programs; they allocate the money poorly; they don’t tie the program to business results; and they don’t communicate well to employees. Only 56 percent of slow-growth companies use revenue and share price as part of their pay-for-performance measures, compared to 80 percent of high-growth companies. Twenty-five percent of companies, according to Hewitt, “focus variable pay measures on their ability to cut costs.” None of the high-growth companies do this.

High-growth companies budget much more per employee for variable compensation.