There are a number of advantages available in a pay-for-performance approach to worker compensation, at least for as many workers as it can reasonably be applied to. It has been shown to, by itself, increase performance in two different ways, for example. First, it tends to motivate workers who have been performing at less than their best, due to lack of motivation and reward/recognition, to increase their performance, often dramatically, compared to what salaries or hourly wages.

This has been most clearly illustrated in a case study of a windshield repair firm, where the first year after shifting from an hourly wage of roughly $15 per hour, or $600 per week, average productivity increased by almost 40%, while overall compensation increased only 10%, i.e. a minimum $4.00:1 ROI ratio for the added pay (probably more since only the revenue per windshield was considerably greater than the pay given to workers for each one). [E. Lazear “Performance Pay and Productivity” American Economic Review 190:5 Dec 2000 1346-1361]

One of the advantages of paying for productivity in general is the fact that it directly and visibly affects their “life assets”. By my count, there are five such assets that are both important to individuals and affected by what their employers do. These are:

• Health – combinations of well-being, energy, physical strength, etc. that affect what we can do with our minds and bodies
• Power – the extent to which we can control/manage our environment and behaviors, perhaps influence others, but at least maintain some degree of autonomy
• Talent – capabilities, attitudes, motivation levels, etc. that determine what we are able to do and accomplish
• Time – both the sheer amount available to use and the portions of it we allot to specific necessities and discretionary use in our lives
• Wealth – personal and real property, liquid assets and investments that greatly determine what we can afford to do with our lives, particularly “discretionary” income and assets

Others may add to this list, but this is the set that I have found highly useful when dealing with attempts to influence human behavior in the contexts in which I have worked, in both marketing and management. And each offers an avenue to influencing behavior by enabling people to achieve gains or reduce costs related to one or more of these assets. Other approaches may work as well, but any strategy that does not take into account all five and the gains vs. costs relative to each involved in making behavior change is likely to be less effective.

The above firm soon discovered that paying for productivity alone brought with it two negative side effects, not anticipated when the P4P system was introduced. In order to maximize their “wealth asset” gains, workers tended to be somewhat slipshod in terms of the quality of their work, making it necessary to have the windshield re-installed in many cases. After assigning the job to whoever was available, the firm switched to making the original installer do it over, thus ensuring that there was no reward, indeed a penalty in added time asset costs without any added wealth asset gains. This took care of the problem.

But workers also leaned toward less care in ensuring that customers would be satisfied with their work. When the original windshield had been broken, and glass strewn inside the car, for example, workers were often a bit lax in ensuring that all the glass pieces were vacuumed up. To address this decline in service quality, the firm instated a customer satisfaction dimension into the P4P scheme. By combining the sheer output (numbers of windshields installed) with both technical and service quality dimensions, the former “Pay for Output” (P4O) system became a true Pay for Performance system.

This was accomplished by adding two more levels of incentive pay. For employees who increased their output from the original 2.5 average windshields installed per day to as much as 3.8 per day, a 52% increase, provided they also maintained an average customer satisfaction rating in surveys of 95% satisfied, they would get an additional $2.00 per windshield. This amounted to at least 3.8 x $2.00 = $7.60 per day or $38.00 per workweek. If they increased to 4.5 windshields installed per day and 97% customer satisfaction, they could get another $4.00 per windshield = $18.00 per day or $90 per week.

While their normal P4P compensation was reflected in their weekly paychecks, the extra output/satisfaction-based payments were accrued and paid out as a bonus twice a year. Since this bonus could be as much as $90 x 26 = $2340, it was far more significant when paid in a separate check than when added in smaller amounts to weekly paychecks. It felt far more significant to workers, who could use it for purely discretionary splurge purchases if they liked. [B. Hall, et al. “Performance Pay at Safelite Auto Glass” Harvard Business School (Case Studies 9-800-291 & 292) December 6, 2001)]

The P4P system gave employees boosts in at least three of their “life assets”, namely power, time, and wealth. By favoring high performers, who came close to doubling their personal compensation counting all incentives, it made a dramatic positive difference in their wealth account. Because it enabled them to control how much they earned by managing their own time and effort investments, it added significantly to their personal power and autonomy asset. It added to yet another asset, namely their time account, by enabling them to adjust the number of days or hours per day they worked according to their personal and family needs, while still ensuring an adequate income.

By combining three of the five life assets, such a P4P system can significantly enhance the effects of altering how employees are paid. It also adds an opportunity for employees to track and report, or at least to enable employees to track and remind themselves of how much better off they are for their added performance. By accruing a portion of the incentive payments into twice-yearly bonus checks, it gave employees a visible and more powerful reminder of their improved situation.

Had the employer simultaneously worked on its workers’ health asset, through worksite wellness or other employee health management efforts, or added training of some kind to enhance their talent assets, it would have maximized the number of life assets addressed and involved in its overall strategy. But involving three of the five proved highly effective in this case.