If a company pays for performance, the rating should explain a meaningful share of why one person earns more than another. Across more than 158K U.S. employees at nearly 50 Syndio customers, it explains only 0.25 percentage points of the differences in base pay. The link between pay and performance is real, since our research shows that a rating one step higher earns about 5% more base pay at the same company and job level. It is, at the same time, also small, because employer and job level explain 71.5% of the differences. The full numbers are in Does Pay for Performance Work? What the Pay Data Shows.
Attendees at Syndio’s Pay for Performance, Tested webinar showed the gap between claim and check. Over 62% said their company pays for performance. Just over a third said they compare pay to ratings by job level each cycle. Close to 60% had been pushed in the past year to tie pay more closely to performance, by the CEO, board, or investors, or by finance, managers, or employees.
Two researchers joined the webinar to explain why the formula keeps falling short: Colby Kennedy Nesbitt, PhD, head of talent experience research at Netflix, and Lauren Bidwell, PhD, senior research scientist at SAP SuccessFactors, Future of Work Research Lab. Their answers share a starting point: before you can test pay for performance, you have to decide what your pay is for.
Paying for performance is only one reason to pay people
Performance is only part of why companies pay people. Nesbitt’s list runs from job security, to attracting and keeping people, to reflecting the role’s impact, to recognizing performance and encouraging more of it. “There are a lot of reasons we pay people. All of those may be at odds with one another. They may serve different purposes. Only the last two, recognizing someone’s contribution and incentivizing future performance, are really related to the idea of paying for performance,” Nesbitt said.
Two questions sit underneath. What a skill is worth in the market can be answered with data, because benchmarks exist. What the work is worth to the business is the question her field has never answered to its own satisfaction, and it is the one pay for performance is meant to reward.
In most cases, pay doesn’t follow that value. “We don’t pay people according to the impact that they have in the business in most cases, unless we’re talking about sales or variable comp or a few special case roles and scenarios,” Nesbitt said. The result is a gap between what companies say matters and what they reward. “The way that we talk about what actually matters deviates a lot of the time from how we’re actually structuring these rewards.”
That is why a yes to “do you pay for performance” says little. The phrase covers very different intentions, and a company that hasn’t articulated these clearly has nothing to test against. Copying the market doesn’t fill the gap. “Benchmarking to the 50th percentile is not a strategy,” Nesbitt said. “It should be aligned with your business strategy.”
The pay philosophies that hold together look different from one company to the next. One wants the best talent and pays enough that people aren’t tempted to leave. Another values internal consistency so much that it doesn’t negotiate starting salaries or counter outside offers. Both are viable, and Nesbitt’s advice is to tailor pay to the business context, starting with what the company can afford to pay for its most critical roles.
Define performance before you try to test it
The test only works if performance has a definition, and Bidwell’s research shows why that is getting harder. Traditional performance management assumed stable jobs, annual goals, and a manager who could see most of the work. Jobs now shift, priorities move across teams, and AI can generate output at the snap of a finger, which weakens output as a measure of contribution.
SAP SuccessFactors surveyed more than 4,000 employees and worked with more than 50 HR leaders at its customer organizations. 80% of employees said better performance clearly leads to better pay where they work. They also estimated that only about 70% of what they contribute shows up in the performance system. This means they believe that a third of the value people create is largely invisible to the system meant to reward it. What goes unseen is cross-team work, improvements to systems and processes, work that helps others succeed, and impact that takes two or three years to appear. Two thirds of employees say performance management has to evolve, and three in four say the definition of good performance will change as AI becomes part of the work.
Bidwell’s answer is to define performance first. “Before deciding how to pay for performance, we need to decide what kinds of contribution the business really needs to create value in the future,” she said. Then test it: “Compare the things that are going to drive the greatest value for us over the next couple of years to what our performance system is currently set up to measure and reward, [and analyze] where those two things do not line up.”
The case for doing this is a business case. “This isn’t just an HR process problem,” Bidwell said. “This is a very business-oriented question of how effectively we are allocating our investment in our people.” Both researchers land on the same thread: alignment between business strategy and the pay that is supposed to carry it out. That is the argument of The Last Mile of Strategy: Pay Is Where Strategy Gets Tested.
If you can’t explain a pay decision, you can’t test it or improve it
Explainability is where the test starts, and Nesbitt’s measure of it is simple. “Can I explain why I am paid what I am paid, and why someone else might be paid differently than me?” she asked. “Can managers explain it to their teams in a way that instills confidence and not confusion?”
Explainability does two jobs. First, it shows whether what you do today is working. Pay data shows what happened, and the reasons show whether it was intended. Attendees showed how thin those reasons can be. Asked which of three questions would be hardest to answer from their own data, most picked how much off-cycle money went to retention counteroffers, which depends on whether anyone recorded why. Second, explainability is what lets you fine-tune pay and co-create new systems of reward with the business. Nesbitt framed any request to tie pay more closely to performance as the start of a conversation rather than a for-and-against debate, and you can’t co-create with people who can’t describe how pay works today.
How you can test whether you pay for performance
Defining your pay objectives is the first job. Then collect why you pay what you pay, looking at documented reasons and explanations. Why you pay what you pay may be hard to collect and information often sits in separate systems. That in and of itself is a finding.
Paying as you intend – like paying performance – requires the right context. We call it Decision Intelligence for Pay. It starts by connecting pay data across systems and compares what you pay for in practice with what you say you pay for. It corrects what it finds, with recommendations for adjustments and new processes so the same issues don’t keep coming back. It reveals the hidden costs of practices such as off-cycle increases to match outside offers. Last, it scales the change with better guidance for hiring managers as they make each pay decision, so the same fixes aren’t needed every cycle.
Hear the full conversation
If you can’t yet say what your pay objective is, you are in good company. Very few of the HR leaders in Bidwell’s research feel ready to measure impact. Start with one decision, not the whole system. Write down what the company was trying to achieve with it, then check whether the pay that went out matches. If no one can say what the company was trying to achieve, that is your finding.
Watch the replay to hear Nesbitt and Bidwell on why we pay people, what performance systems miss, and how to make pay explainable. For the research behind the conversation, read The Last Mile of Strategy.
What is the pay objective at your company, and could a manager explain it to an employee tomorrow?
