OCTOBER 2013 / THE CPA JOURNAL60 By David Bukovinsky Pay-for-performance (PFP) systems,once the purview of senior execu-tives, are becoming more common for workers at all levels of organizations. These systems provide a win-win situation for organizations and employees. Organizations want to elicit the greatest productivity from workers, and PFP sys- tems reward employees for excellent results. They focus employee attention on the goals and targets established by man- agement; the attainment of these goals translates into organizational success and greater remuneration. Organizations that tie compensation to performance produce bet- ter financial results than those that do not, research has shown. In general, the posi- tive effect increases as more employees are included and as the proportion of their salaries determined by performance increases. Oftentimes, however, programs do not live up to expectations, and results can be disappointing or even detrimental. Deciding What to Measure For example, consider a real-life employee who worked in the customer service call center of a major corpora- tion. Workers’ performance was measured based upon the number of calls they answered each hour. When asked by the author what this motivated workers to do, the employee replied, “End the call with the customer as quickly as possible so we can get on to the next call, whether the customer’s problem was solved or not. If they call back, it just further improves our performance statis- tics. Hanging up on them in mid-conver- sation can actually ‘improve’ our perfor- mance. If they call back, it just adds to the number of calls answered that hour.” She also stated that bonuses were based upon the number of calls fielded each hour. In effect, employees were rewarded for efficiency, not effectiveness—and effi- ciency came at the expense of good cus- tomer service. Needless to say, this is not what management intended; the law of unintended consequences had been invoked. A more effective performance measurement would have considered the number of issues resolved per hour. This illustrates several potential, yet com- mon, problems with performance-based com- pensation. PFP systems are well intended, but their design, implementation, and results often leave much to be desired. Once the dust set- tles, the heralded system is revealed to be ineffective or, even worse, detrimental. Addressing Design Issues A fundamental mistake that organizations frequently make is designing a PFP system in which the measures do not align with organizational goals. As a result, goal attain- ment does not produce greater net income, stock price, or customer satisfaction, as illus- trated by the previous example. Even if the desired number of calls per hour were achieved, it would be unlikely to impact profitability. One could argue that answer- ing more calls per hour would increase cus- tomer satisfaction, resulting in greater sales; however, the number of calls answered i.

1. OCTOBER 2013 / THE CPA JOURNAL60
By David Bukovinsky
Pay-for-performance (PFP) systems,once the purview of senior
execu-tives, are becoming more common
for workers at all levels of organizations.
These systems provide a win-win situation
for organizations and employees.
Organizations want to elicit the greatest
productivity from workers, and PFP sys-
tems reward employees for excellent
results. They focus employee attention on
the goals and targets established by man-
agement; the attainment of these goals
translates into organizational success and
greater remuneration. Organizations that tie
compensation to performance produce bet-
ter financial results than those that do not,
research has shown. In general, the posi-
tive effect increases as more employees are
included and as the proportion of their
salaries determined by performance
increases. Oftentimes, however, programs
do not live up to expectations, and results
can be disappointing or even detrimental.
Deciding What to Measure
For example, consider a real-life
employee who worked in the customer
service call center of a major corpora-

2. tion. Workers’ performance was measured
based upon the number of calls they
answered each hour. When asked by the
author what this motivated workers to
do, the employee replied, “End the call
with the customer as quickly as possible
so we can get on to the next call,
whether the customer’s problem was
solved or not. If they call back, it just
further improves our performance statis-
tics. Hanging up on them in mid-conver-
sation can actually ‘improve’ our perfor-
mance. If they call back, it just adds to the
number of calls answered that hour.” She
also stated that bonuses were based upon
the number of calls fielded each hour.
In effect, employees were rewarded for
efficiency, not effectiveness—and effi-
ciency came at the expense of good cus-
tomer service. Needless to say, this is not
what management intended; the law of
unintended consequences had been
invoked. A more effective performance
measurement would have considered the
number of issues resolved per hour.
This illustrates several potential, yet com-
mon, problems with performance-based com-
pensation. PFP systems are well intended, but
their design, implementation, and results often
leave much to be desired. Once the dust set-
tles, the heralded system is revealed to be
ineffective or, even worse, detrimental.
Addressing Design Issues

3. A fundamental mistake that organizations
frequently make is designing a PFP system
in which the measures do not align with
organizational goals. As a result, goal attain-
ment does not produce greater net income,
stock price, or customer satisfaction, as illus-
trated by the previous example. Even if the
desired number of calls per hour were
achieved, it would be unlikely to impact
profitability. One could argue that answer-
ing more calls per hour would increase cus-
tomer satisfaction, resulting in greater sales;
however, the number of calls answered is
too far removed from customer satisfaction,
which is more closely tied to the quality of
Are Pay-for-Performance Systems
Missing the Mark?
M A N A G E M E N T
h u m a n r e s o u r c e s
Overcoming Design, Implementation, and Operational
Challenges
responses that the customers receive. This
system, as described by the employee, might
actually reduce customer satisfaction. Thus,
a good starting point in designing such a
measurement system is to ask how, or if, an
improvement in a specific activity will
impact company profitability or some
other strategic goal. The process of design-

4. ing metrics should begin only after that link
is understood.
The call center example illustrates a sec-
ond common problem with a PFP mea-
surement system: poorly designed, con-
fusing metrics. In the previous example,
management considered an increase in
the number of calls answered per hour to
represent an improvement in performance.
But does an increase in the number of calls
handled imply greater efficiency? Or does
it just mean that call volume is increasing
because more customers require customer
service? Ideally, the call center would han-
dle fewer calls per hour or even none at
all; this would indicate fewer support
issues, resulting in a decreased need for
customer service capacity.
This measure is poorly designed because
it measures efficiency, but not effective-
ness. In addition, one can question whether
improvement would be indicated by an
increase or a decrease in the measure. If
managers debate the meaning of a mea-
sure, or don’t understand exactly what is
being measured, a PFP system will be of
little use, and the measurement process will
waste resources.
Another example of a poorly designed
measure can be found in the 2010
Transocean/BP Deepwater Horizon drilling
rig explosion and oil spill in the Gulf of
Mexico. The accident resulted in 11 deaths,

5. billions of dollars in fines and cleanup
costs, and an immeasurable impact on the
two companies’ reputations. Despite this,
senior executives at Transocean received
significant bonuses for what the company
described as its “best year in safety per-
formance.” The measurement of safety per-
formance was based upon the number of
incidents and the potential severity of the
incidents; it appears that the total number
of incidents was sufficiently low to offset
the potential severity of the Deepwater
Horizon incident.
A third common problem is basing
bonuses on items beyond an employee’s
control. For example, an employee might
be able to improve his efficiency and effec-
tiveness in answering calls, but only if there
is a backlog of calls to be answered. If
there are not enough calls, an employee
cannot increase the number of calls han-
dled per hour. Greater speed in handling
calls would only result in more idle time.
Similarly, manufacturing employees can-
not be expected to meet quotas if upstream
operations are interrupted and the flow of
products slows or stops. Company-wide
bonuses based upon net income or stock price
have little or no motivational force. Most
employees work in jobs that are too far
removed from such measures and are unlike-
ly to be measurably impacted, regardless of
how well the employee performs.

6. Fostering a collaborative attitude does
not help, and employees are still likely to
remain unmotivated by the plan. From
the average employee’s viewpoint, any
bonus based upon net income is akin to a
random event, rather than a situation that
they can influence. A cardinal rule of any
measurement system, particularly a PFP
system, is that employees should only be
evaluated on factors they can control. In
most cases, this will translate into localized
measures that are directly related to an
employee’s duties but that still move the
organization toward its goals.
Performance Measurement Criteria
Some criteria for evaluating performance
must be established. They may be objec-
tive or subjective, both of which have
advantages and disadvantages. Objective
measures are clear-cut; employees know
what performance will be measured and
how it will be measured. But objective
measures present two problems. First,
employees might game the system by
focusing on established criteria at the
expense of other job duties or, worse yet,
falsifying performance data. Second, not
all aspects of job performance can be mea-
sured by objective, quantitative data. This
is one of the main issues confronting
school districts wishing to base teacher
salaries on performance: do the students’
scores on tests actually measure a teach-

7. er’s ability to convey the joy of learning
or to increase interest in subjects?
Subjective performance evaluations
allow for the consideration of performance
on a broader range of activities. The obvi-
ous drawback is that they are subjective.
Because subjectivity requires management
discretion in evaluating performance, it
opens the door for employees to dispute or
distrust the evaluations, and it often results
in evaluations based upon personalities and
organizational politics. In this case,
employees might view the possibility and
amount of the bonus to be more political
than related to performance.
Any PFP system must compare actual
performance to some target. A vague goal
(e.g., “do your job better”) is useless, espe-
cially if bonuses are to be based upon
performance. Vague qualitative goals often
result in bonuses awarded solely at man-
agement discretion, not because of actual
performance. Some quantitative criteria for
evaluating performance must be estab-
lished. This is where benchmarking against
targets comes into play. Performance can
be evaluated on an absolute or relative
basis. Absolute performance relates to a
specified target, which may be a goal (e.g.,
$X of sales) or a trend (e.g., three contin-
uous months of improvements).
But where do such targets come from?

8. For example, why is the goal a 10%
improvement, rather than 8% or 17%? The
chosen goals are often arbitrary, round
numbers. This is not necessarily a prob-
lem, but there are some circumstances in
which specific goals can create problems.
The first is when the goal is beyond
the capability of the employee or system.
This will foster resentment and possible
backlash as employees realize that no mat-
ter how well they work, they cannot
achieve the bonus. Employees might
view this as an insult. To be offered the
possibility of a bonus but have the goal
be out of reach (either intentionally or unin-
tentionally) is worse than not having a PFP
plan at all.
Another problem arises when conditions
beyond employees’ control favor some
employees over others. For example, a goal
of increasing sales by 10% would be eas-
ier to reach for a salesperson whose terri-
tory is an area that is displaying strong
growth than for one whose territory is
mired in recession. Setting goals too low
is also problematic, because employees
might relax their efforts after reaching the
goal, especially if the bonus is a fixed
amount. Countering this problem with a
sliding-scale bonus has its own faults,
particularly if there is a cap on the bonus
61OCTOBER 2013 / THE CPA JOURNAL

9. OCTOBER 2013 / THE CPA JOURNAL62
amount. A sliding-scale bonus will moti-
vate continuous improvement only to the
point where the bonus is capped. Reaching
the cap will reduce employee motivation
to improve because greater effort receives
no additional reward. In either case, an
employee might “bank” further achievable
performance gains to be used against the
following year’s target.
Sales bonuses represent a prime exam-
ple. If a salesperson is relatively confident
that she will not meet this year’s goal, she
might intentionally defer sales to the fol-
lowing year to improve her chances of a
bonus in that year. Alternately, the sales-
person could accelerate sales or “stuff the
channel” at year-end to meet the goal,
knowing full well that some of the sales
will be returned in the following year or
will reduce her sales for the following year.
Customer relations might be damaged if
salespeople imply that customers should
buy now because of “possible” price
increases in the future, ship unordered
goods to customers, or delay delivery of
purchases.
Relative performance compares one
employee’s performance to another or to
some other metric. For example, salesper-

10. sons at a car dealership might be compared
against each other, or the productivity gains
of a manufacturing department might be
compared to industry-average productivity
gains. Care should be taken with systems
that compare employees or groups to
each other.
For example, at an educational institu-
tion that the author is familiar with, bonus-
es are based upon a faculty member’s
performance rating, compared to the aver-
age rating of all other faculty members in
the same organization. Three problems are
evident. First, the individual has no con-
trol over the performance of others; supe-
rior performance by the individual might
not receive the recognition it deserves if
other employees are also performing well.
The second problem is a corollary to the
first: a mediocre employee might be
rewarded for being the “best of the
worst” if other employees are performing
at low levels. Similar issues arise when
comparing performance to an external
benchmark like an industry average. The
final problem is the lack of a consistent
means of rating employees. Because
department managers rate their own
employees, workers in a department with
a diligent manager who gives honest
evaluations are at a disadvantage when
compared to employees in a department
with a manager who maintains his popu-
larity by giving everyone high ratings,

11. regardless of whether they are deserved.
Relative performance measures might also
motivate employees to sabotage the work
of others to make their own performance
appear better.
The period covered by the performance
appraisal must also be considered. The
ubiquitous annual evaluation feeds into the
criticism that most organizations, especial-
ly publicly held ones, are too narrowly
focused on annual results. Rewarding
employees for reaching short-term goals
can have detrimental long-term impacts.
For example, discretionary costs represent
the low-hanging fruit employees and man-
agers will often reach for. Consequently,
cutbacks are often focused on such areas
as employee training, research and devel-
opment, customer development, and other
activities that create long-term value for an
organization.
Motivating employees to achieve short-
term goals also forces them to bypass
projects with long lead times before ben-
efits are realized. Short-term goals might
foster an “I’ve met this year’s goal, so I’ll
save my other ideas for next year” men-
tality. As a result, improvement projects
are not implemented as quickly as possi-
ble and results are deferred until later
periods. Creativity and risk-taking are sti-
fled. Moreover, achieving short-term goals
might not add up to long-term success.

12. Longer time horizons can reduce these
problems, but they can also create other ones.
How long should the evaluation period
extend? If it is too short, the problems asso-
ciated with annual performance reviews
will not be mitigated. If it is too long, an
employee might not be overly concerned
because she believes she will have moved on
to another position within the organization or
to another organization entirely before her
performance is evaluated and rewarded.
Longer time horizons also force employees
to accept deferred gratification, which might
reduce employee satisfaction and, conse-
quently, performance.
Understanding the System
The bonus allocation formula in the edu-
cational institution example above illus-
trates another common problem with PFP
systems—understandability. The complex
allocation formula included variables, vari-
ables with subscripts, and Greek symbols.
Some employees in the organization could,
with a little analysis, understand how
their bonus amounts were calculated.
Others found the calculations indecipher-
able and, thus, could not understand the
linkage between their performance and the
resulting bonus.
If the measurement system and bonus
allocation scheme are unintelligible to
employees, it will not produce the intend-

13. ed effect because it will be ignored.
Complexity does not necessarily translate
into effectiveness. The same can be said
if employees do not understand why per-
forming certain activities, or performing
them at a certain level, is important. Job
responsibilities should not have meanings
that are hidden from the employees.
Instead, employees must understand why
something needs to be done and why it is
important to do it well.
Additional challenges occur when PFP
systems are used with teams. Teams can
outperform individuals because they take
responsibility for an entire project, rather
than just some portion of it, and because
team members have a common goal. This
can motivate them because they can see
how their efforts contribute to the end
Motivating employees to
achieve short-term goals
also forces them
to bypass projects with
long lead times before
benefits are realized.
result. There is also social pressure to per-

14. form well and not let the team down.
Ideally, these two factors will steer indi-
viduals toward performance that is in the
best interest of the team and organization.
The primary, and obvious, problem arises
when individuals do not contribute even-
ly. As a result, other team members must
pick up an underperformer’s duties to
successfully complete a project. Under such
circumstances, basing compensation upon
team performance becomes problematic.
The free rider is rewarded based upon team
performance, not on his own merit; thus,
such individuals are overcompensated
and the remainder of the team is under-
compensated for their efforts.
The composition of a team can also
affect the performance of otherwise com-
petent employees. Team dynamics might
bring out the best or worst in the team
members. At best, more experienced or
knowledgeable members can help improve
the performance of others. At worst, per-
sonality conflicts, politics, or other rifts can
result in intended or unintended interfer-
ence with member performance.
Team-based compensation schemes
might also affect mobility and movement
in and out of teams. A high-performing
team might resist the addition of new mem-
bers if they believe it will weaken the team
and consequently reduce their compensa-
tion. Alternately, members who believe the
rest of the team holds back their perfor-

15. mance might be motivated to leave one
team for a stronger one. The combination
of these two tendencies can eventually
result in a concentration of excellent per-
formers in certain teams, leaving other
teams populated with weaker performers.
Implementation and Operational Issues
Although design plays a large role in
PFP systems, other issues arise during a
system’s implementation and operation.
One of the most important steps in the
implementation stage is communication.
Employees must understand what is
expected of them, which activities will be
evaluated, how those activities will be eval-
uated, the goals their performance will be
judged against, and how the PFP system
impacts their compensation.
Poorly designed systems allow for unin-
tended consequences. In the call center
example, management unwittingly moti-
vated the employees to do something detri-
mental. Admittedly, the employees in that
situation consciously acted in a way they
knew was counter to management’s
intention. Poorly designed systems also
open the door for outright manipulation,
especially when recurring, short-term tar-
gets are used. As previously noted, the
employees were not only performing these
injurious activities, they were being paid
to do so.

16. But that is not always the case. Employees
might act in good faith, trying to improve
performance, only to later discover that their
well-intended actions caused undesirable out-
comes. Management must be alert to these
possibilities and take steps to prevent them.
Good communication can alleviate many
of the unintended negative consequences that
can result from the actions of well-inten-
tioned employees.
Intentional gaming of the system for per-
sonal gain is more difficult to control.
Expectations of ethical behavior that per-
meate all levels of the organization and are
constantly reinforced, upheld by example,
and enforced when necessary might serve to
overcome some of the temptation to com-
mit self-serving actions. An ethical envi-
ronment is more likely to align employee
actions with the organization’s well-being.
A lax environment allows employees to
revert to their own self-interest.
The composition and size of bonuses can
also be an issue. The type of bonus—cash,
additional time off, trips, prizes—might be
important to employees. Different people
are motivated by different means.
Regardless of its composition, the bonus
pool in a PFP system must be of suffi-
cient size to motivate employees.
Employees will not respond to a system in
which the potential bonuses amount to lit-
tle more than a pat on the back.

17. The author dealt with a situation in
which the difference between being a supe-
rior employee in an organization of infe-
rior performers and being an inferior
employee in an organization of superior
performers was virtually nil. Using some
hypothetical data in the organization’s
bonus allocation formula, the author found
that the difference amounted to approxi-
mately $50 per month for employees
whose annual base salaries ranged from
$70,000 to $100,000. Obviously, there was
little monetary reason to perform at a
high level. It is also worth noting that
employees working long hours or in excep-
tionally stressful jobs, such as hospital
emergency room staff or CPAs during busy
season, might be more motivated by addi-
tional vacation days or some other form of
nonmonetary compensation. Allowing indi-
vidual employees to choose their type of
bonus compensation can go a long way
in making the PFP system successful.
Implementation Suggestions
PFP systems can be powerful motivators
and an important component of a continu-
ous improvement system; however, such
plans are not without pitfalls. Management
must carefully consider what it hopes to
achieve by rewarding performance, and it
must design systems to promote desired

18. behaviors consistent with organizational
goals. The PFP system must be based on
activities within an individual’s control that
can be evaluated with some degree of cer-
tainty and can be compared to some bench-
mark. Finally, the amount and type of com-
pensation awarded must be sufficient to
motivate employees to perform as desired.
PFP systems are very effective in theory, but
are not as easy to implement in reality as is
often assumed. q
David Bukovinsky, PhD, CPA (inactive),
is a professor of accountancy at Wright
State University, Dayton, Ohio.
63OCTOBER 2013 / THE CPA JOURNAL
The PFP system must be
based on activities within
an individual’s control
that can be evaluated
with some degree of
certainty and compared
to some benchmark.
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