When Pay for Performance Goes Bad

It’s been pretty hard this week not to hear about how AIG Financial Products executives received some $165 million dollars in bonuses, after the company received a $170 billion federal bailout. All the media coverage and analysis aside, I think there’s a lesson for all of us in the AIG example about how pay for performance can go bad.

When pay for performance works, it’s a strong talent management program which inspires and rewards high levels of performance, employee engagement and more. But when pay for performance goes bad, as this case and too many others illustrate, it can be disastrous. While I can’t speak specifically to the case of AIG, what I can tell you is that most failed pay for performance programs stem from a few key areas: rewards that are too high, poor communication, and taking a mechanical view.

One of the biggest failings of pay for performance is that too often, there’s a mechanical view of the program. What I mean is that there can be an assumption that pay-for-performance is just about the money for all employees. This approach fails to recognize that humans are motivated by many different factors and fails to account for how each individual will react. One employee may be thrilled with a $9,000 bonus while the other is insulted because it is less than $10,000. Which brings me to the next point: with proper communication, these same employees would have a stronger understanding of why they received $9,000 vs. $10,000. HR and managers need to have clear, consistent communication procedures around pay for performance, to ensure employees understand how they are doing and what that is likely to mean in terms of reward.

Probably one of the most common problems with pay for performance (which definitely comes into play in the AIG case) is that rewards shouldn’t be too high. The idea of pay for performance is to recognize success, not to have people rely on it, or even encourage the wrong behavior. Rewards that are too large can motivate people to engage in activities that are not in the best interest of the company, or are illegal.

While I’m a firm believer in rewarding success and the power of pay for performance, these programs have to be done right, or not done at all. There have just been too many headline-grabbing examples in the last few years of executives being rewarded for driving a company into the ground, which only quashes the spirit of pay for performance. For pay for performance to succeed, organizations need to ensure all employees are involved and understand how their individual performance is being assessed – including the person at the top.