What do you get when you pay people to perform?

Jan 30 2008 by Bob Selden Print This Article

In March 2007, an Indonesian Garuda Airlines Boeing 737 crashed on landing at Yogyakarta airport in Java. 21 people died and scores were injured. A deadly toll when you pay people to perform.

Press reports at the time suggested that the crash might have been caused by the pilot trying to save fuel by going ahead with the landing rather than making another attempt.

"A Garuda policy of preserving fuel may have been why a pilot did not abort a landing in Yogyakarta last month that killed 21 people", the head of the Indonesian airline's pilots association said.

He added that he was concerned about Garuda's policy of paying pilots a three per cent bonus if they conserved fuel.

"The company is making extra payments to pilots if they can conserve fuel. Maybe this is bothering the pilots."

Not only is this a disturbing safety concern, it raises the contentious issue of individual pay for performance.

Individual pay for performance runs contrary to teamwork and ultimately, organisational effectiveness. If everyone is out to "do their own thing", the consequences must surely lead to lack of consideration of others and ignoring the use of their expertise.

In the Garuda crash, the Sydney Morning Herald reported that the pilot continued to land despite the urging of his co pilot and 15 warnings from the aircraft's alarm system to abort and go round again.

Many organisations today are looking to increase their bottom line by paying their people to improve individual performance. For instance, it is now quite common for a large percentage of a person's salary (particularly senior managers) to be based on their performance, with a smaller component made up of base salary.

Why do organisations continue to throw money at performance issues? If organisations were better managed and led, would there still be the need to offer people incentives to perform?

Contrast this "pay for performance" approach with another article in the Sydney Morning Herald describing a small pharmaceutical company, Blackmores, that had just been given a Best Employer Award.

Their secret? They look to the long term development of their people, encourage them to take responsibility, reward them with good salaries, and include them in a company wide profit sharing scheme.

As one Blackmores employee, Pamela Stone said "There's a culture of openness and genuine support and honesty which keeps people motivated".

Performance pay is now almost universally a part of the standard makeup of organisation compensation policy, particularly in western countries. So, if performance pay is a "given" can it be improved to increase employee effectiveness, teamwork and organisational effectiveness?

Fortunately, there is a set of principles. Many successful organisations take the following four phased, cascading approach to performance pay.

1. Base salary relative to industry standards – this is the major component of salary

2. Profit sharing: inclusion in a company wide profit sharing scheme

3. Team performance: inclusion in a team based performance scheme

4. Individual performance: achievement of personal objectives – the smallest component of salary

Does this approach work?

One of the largest and most successful pharmaceutical companies in the world, uses these principles. For example, their base salaries (which make up the largest component of pay, approximately 85%) are amongst the best in the industry.

Of the remaining 15% component of salary, 40% relates to company profit, 30% to team performance and 30% to individual performance. But over and above salary, they manage and lead their people really well – people enjoy working for the company as evidenced by the lowest staff turnover rate in the industry.

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About The Author

Bob Selden
Bob Selden

Bob Selden, is an author, management consultant and coach based in New Zealand and working internationally. Much of his time currently is spent working with family businesses. He's the author of the best-selling What To Do When You Become The Boss. His new book, What To Do When Leadership Is Needed, was released in July 2022.