Who Are the Winners and Losers in Performance-Based Compensation?

The other day I left a working session with a client where we were tackling the question of whether and how their team members should be compensated based on performance. Inevitably, it was a challenging and values-laden conversation. Performance-based compensation is an approach where some or all monetary compensation is related to how employee performance is assessed relative to stated criteria. This model is intriguing enough that it comes up in virtually every compensation or performance management project I’ve ever been involved in.

What does research tell us so far about compensation approaches? Most teacher compensation systems, in an attempt to be fair, base rewards off of years of experience and educational attainment using a “step and lanes system. Yet, research shows that advanced degrees have little effect on student academic success except in the areas of math. And while teachers’ increasing experience in the early years leads to greater student achievement, there is limited evidence that teachers continue improving after five years on the job. With recent attempts at less-traditional approaches involving performance-based compensation, we have learned a great deal about how compensation can help retain our most effective teachers and therefore improve student achievement. Yet the “perfect” organizational compensation plan remains elusive.

Why is there still no playbook we can all follow around performance-based compensation? Because every compensation decision is about tradeoffs, which means there are winners and losers. I have yet to meet an administrator who wants to pay their educators less, yet there is a literal fixed pie that goes into school budgeting decisions, and educator compensation is by far the biggest piece of that limited pie. While we might want a world where we can keep everyone’s pay at least as good as it is now and provide incentives for our strongest teachers to stay in the classroom, that extra money has to come from somewhere (and hopefully a funding source that won’t be gone in a couple of years).

So let’s look deeper at some of the tradeoffs that apply to three different types of performance-based compensation:

1. Stick with a traditional “step and lanes” system, but teachers only move up a step if they meet a minimum specified level of performance

What is this? This is the simplest variation from the traditional experienced-based step schedule we often see in education, and therefore the one most likely implemented in larger districts or those just testing the waters. Truly low-performing teachers stop seeing automatic increases every year. In systems with early teacher tenure — where administrators may otherwise find themselves with low-performing, high-seniority teachers making far more than newer highly effective teachers — limiting increases to those meeting a specified performance level can mitigate limited resources going to low-performing teachers.

Who are the potential winners? The freed-up budget can then go to things that might benefit students, including classroom resources, aides, or other supports. If low-performers self-select out because of lower compensation, that frees up funds and teaching spots to bring in more effective teachers.

Who are the potential losers? This is a policy that sounds like a step in the right direction but might maintain the status quo (if all teachers are rated “effective” regardless of performance). High-performing teachers are potential losers as this policy does not incorporate higher pay for higher performance — it only helps to potentially weed out low performers.

2. Earn one-time incentives such as bonuses

What is this? One-time incentives offer an opportunity to give something out those meeting performance criteria without committing to do so forever or “messing” with an existing salary structure.

Who are the potential winners? Teachers who meet the performance criteria, especially teachers who find particular meaning and recognition in one-time “gifts.”

Who are the potential losers? Risk-averse educators will not like this approach. Those dollars going into the bonuses are being taken out of the same budget, so they will impact the potential for future salary increases. Teachers who want to be able to predict their long-term compensation potential are left with no promise for the future, and those on pension plans based on their salary are left with lower long-term retirement funds. Administrators and students may also end up losers, if the bonuses become less salient/meaningful and do not impact retention of effective teachers — and research shows that smaller bonuses do not impact teacher retention.

3. Adjust base salary based on performance

What is this? This approach differentiates the rate of salary increases based on recent performance, and while the ranges are often small (1-3%), we have seen ranges as high as 10% in some systems.

Who are the potential winners? High-performers who are confident in their performance as measured by their school are the biggest proponents of this type of approach. With enough of these high-performing teachers choosing to stay in the classroom, students win too.

Who are the potential losers? Those who are not confident in the measurement of their own performance (regardless of actual performance) may feel anxious about this kind of approach. Since the perfect performance evaluation system remains elusive — with ongoing debates about how test scores, observations, student feedback, and other indicators should be incorporated — high stakes tied to an ineffective evaluation system can lead to big challenges. If educator energy goes into gaming the evaluation system rather than driving real impact, almost everyone loses.

Discussions about performance-based compensation are hard because there will be winners and losers with any approach, and defining high and low performance can be challenging and controversial. But even if the perfect plan is elusive,  a “works for us” compensation approach doesn’t have to be, whether it’s a variation of one of the categories above or another creative approach. In our work at Bellwether, we find that districts or charter management organizations that align their compensation approach to a strong and clear compensation philosophy can better identify where to make tradeoffs to support their goals. Recognizing it’s hard doesn’t mean it’s not worth trying, especially if the potential upside is more great teachers feeling recognized and able to stay in the classroom with kids.

2 thoughts on “Who Are the Winners and Losers in Performance-Based Compensation?

  1. Peter Greene

    The problem with all of these options is that they depend on a reliable, valid method of measuring teacher performance. Any system based on bad measures will simply create a batch of perverse incentives.

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