CASE APPLICATION : Pay for Performance

Pay for Performance
A Pittsburgh based company, Black Box Corporation which markets computer network
and other communication devices, developed an innovative solution providing
compensation and productivity. After it flattened its organization, management was
unable to offer promotions like those offered prior to the flattening. In response the
company those offered prior to the flattening. In response the company offered
employees the ability to advance them selves in skills and compensation. For example, an
order-entry clerk who starts at the $17,000 to $20,000l level can make as much as
$35,000 by increasing their value to the company, as measured by a number of objective
Pay for performance has worked so well for Black Box Corporation that it has integrated
incentives into nearly every aspect of its culture. Black Box uses a system of objective
criteria by which management can measure both employee and company performance.
Employees are divided into three classes – developmental, competent and premium –
according to their impact on the company and are then paid according to a range within
those categories as determined by objective evaluations. For example order entry clerk
increase their value as they improve their ability to speak to their international customers
in their native languages. Black Box monitors and tests clerks on the number of calls they
can field and how well they handle them, the number of errors, etc.
Each measure comes with pay consequences because each contributes to productivity and
customer satisfaction. The company also reimburses 100 percent of tuition for job related
course work if the employee can demonstrate competency when the course is completed.
Many employees can leap over several pay grades even when they just joined the
company. Black Box believes that if someone can perform consistently to the next level
of expectation, then they have earned the right to be at the next level and to be
compensated accordingly. If employees don’t perform up to the level of their
compensation, they can be downgraded, but the company gives them a set period of time
to raise their performance. The results are impressive; Black Box has continued to expand
the company without increasing its head count.
Permission Pending
Adapted from Alam Reder, “Pay, 75 Best Business Practices for socially Responsible
Companies, Chap 12 G P Putnam’s Sons, 1995.
Would you prefer a compensation system as described or a more traditional
system, and why?
What advantages do you think such a pay for performance system provides?
What challenges would such a system face with employees?