Many organizations introduce various forms of pay for performance in the hope that it will move the culture of the organization towards a greater focus on achieving results. Companies such as General Electric are often held up as models of how pay for performance systems can drive results – at GE high performers can earn twice the average for the job. Like all things, however, there are some downsides to pay for performance that should be considered.

Here are some tips to avoid the potential pitfalls of pay for performance:

• Linking pay exclusively to individual results can have negative effects on the spirit of cooperation – consider a team based element in the mix of compensation.
• Pay for performance that is open ended can lead to lack of control of budgeting – make sure that there is a well communicated ceiling to the compensation available so that budgets are not busted!
• Difficulties in measuring performance – if you do not choose the right metrics you may be rewarding the wrong things.
• By putting pressure on people to perform continuously at their highest levels you may cause job dissatisfaction and stress which may lead to burnout or resignations.
• By putting all the emphasis on metrics based performance you may potentially reduce the intrinsic motivational drives that lead to innovation and creativity.

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