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Linking a portion of an employee's compensation to performance is, in theory, a good idea. But it doesn't always measure up in practice if the company turns out to measuring someone else's performance

By Robert Rosenberg | Updated on October 01, 2007

For the past decade or so, companies have tried to give employees incentives to work harder by linking a chunk of their annual compensation to performance. But many are finding that the practice does not always work out as intended. The problem, according to management consultant Towers Perrin, could be the performance on which companies have chosen to focus.

A recent Towers Perrin global study of 600 compensation managers at midsize and large companies shows that, while companies were increasing the number of people in variable pay programs, they were making the payout dependent on the company’s–rather than the individual’s–performance. “Beyond the CEO or the CFO, the performance of the organization as a whole is not truly relevant or even the best measure of performance,” says Ravin Jesuthasan, managing principal and practice leader at Towers Perrin. “Variable pay works best when it is linked to the performance of the individual or the team, not the organization.”

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