Most leaders want pay for performance for themselves and their organizations. However, most organizations actually have poorly executed, generic pay programs.

Pay for performance can be an elusive goal, but organizations can make it work, even in years when little discretionary money is available. Many organizations report that pay for performance leads to increased goal alignment and employee effort and boosts their ability to attract and retain top performers.

To understand how some organizations make pay for performance work when others cannot, Sibson Consulting launched the “Real Pay-for-Performance Study,” which looked at the pay for performance practices and results in 140 for-profit (74 percent of respondents) and not-for-profit (26 percent of respondents) organizations in summer 2010.

Data revealed that top organizations use more pay for performance vehicles than other organizations. For instance, they recognize top performance with spot bonuses, equity awards, other long-term incentives and profit sharing in addition to traditional pay vehicles of base pay increases and short-term incentives. By shifting their compensation dollars toward high performers, these organizations significantly improve the return on their compensation investments.

The study also found that best-results organizations provide relatively higher increases to high performers than do other organizations. Further, these organizations understand that top performers are most engaged and motivated to perform when operating in an organization that exhibits an effective pay for performance culture. Best-results organizations are also more effective at aligning goals by cascading budgets and key priorities through unit and department heads. They apply calibration techniques to ensure only true high performers are rated and rewarded as such, and use multiple metrics to track the effectiveness of their culture.

All Employees Are Not Alike

The pay for performance study looks at high-performer pay differentiation for merit increases and annual incentive pay. More than 25 percent of organizations reported 2010 high performers’ salary increases that are 3 percent or more higher than average performers. More than half of respondents gave high performers salary increases that are only 1 to 2 percent higher than average performers, and 12 percent of organizations gave the same base salary increase to high performers and average performers. (Figure 1)