Lately, I've been working with several clients who are grappling with the concept of Pay for Contribution, rather than Pay for Performance. Much of this transformation in thinking is coming about as more and more organizations ask the questions, "What do we pay our employees for, really?" Pay for Performance tends to be a historical view, paying employees for what they have accomplished in the past. It is based on the premise that the employee, with his or her manager, has set SMART goals for the performance period, and has been evaluated against how well he or she achieved the goals identified.

Pay for Contribution, on the other hand, can be backwards or forwards looking, however, it is based more on the premise that the employee has contributed value to the organization is some form or other - whether by growing critical relationships, developing valuable intellectual property, implementing key infrastructure, etc. Often, Pay for Contribution is intended to reward more "intangibles" - elements that add value to the organization, but are difficult to quantify or establish objectives for up front.

And herein lies the rub. Organizations tend to like Pay for Performance because it is based on pre-set goals with specific measures. The employee achieves the goal or doesn't achieve it, and is rewarded based on this fact. Employees like Pay for Performance because it is predictable (assuming goals and performance measures are very clearly laid out.) Pay for Contribution tends to be more fuzzy. Organizations often are not clear on the value of a "contribution" until some time after it has been made. The result is that the criteria in Pay for Contribution are often unclear to the employee, and the resulting reward unpredictable. And if there is one thing that has the potential to frustrate employees, and negatively impact morale, it is when the paycheck is not what is expected.

Whether an organization pays for Performance or for Contribution, it is critical that the organization define as clearly as possible for itself and employees what "performance" and / or "contribution" look like. Even if contribution is not as easily quantifiable or measurable as some performance goals, it is necessary to at least provide a picture, an example, an anecdote - so that employees have some information in order to better decide how to do their work. And the earlier in the pay cycle these expectations are made clear, the better. That way, everyone has a shared understanding of where everyone is going, what it takes to get there, and how rewards will be distributed.

Does your organization have a "Pay for Contribution" policy? How is contribution defined? How is it valued? What works well about it, what doesn't? Would love to hear others' thoughts and experiences on this topic.

Great article today on TheStreet.com today that discusses the House Oversight Committee's dissecting compensation packages of Chief Excutives at 3 major banks: Citigroup; Merrill Lynch; and Countrywide Financial. While the bulk of Nate Worden's article highlights how disconnected company performance and CEO pay at these 3 institutions over the past couple of years, he does include excerpts from the Committee's report that raise some important questions compensation specialists must answer when structuring pay-for-performance deals:

1. How do you protect shareholders from downside risk when attempting to attract the people you feek have the most potential to add value to the stock prices over the long term? "The companies defended the compensation awarded to Prince, O'Neal and Mozilo as fulfillment of contractual obligations that were put in place in an attempt by their employers to attract talent, years before the housing crisis struck, according to the report. "

2. Executive roles are undoubtedly critical to company success. But just how critical? "In 1980, CEOs in the U.S. were paid an average 40 times the average worker, according to the report. In 2006, the average Fortune 250 CEO was paid over 600 times the average worker. While CEO pay has soared, employees at the bottom of the pay scale have seen their real wages decline by more than 10% over the past decade."

3. Do you have any basis for comparison? Can you defend it? In 2006, a new compensation consultant, Exequity, raised new questions about Mozilo's compensation [at Countrywide. The firm said his contract was based on a flawed "peer group" of companies that inflated his pay and inappropriately placed him at the top of the peer group in terms of salary and bonus.

4. Who is your client? "Although the company retained Towers Perrin, internal emails show that the consultant appeared to serve as Mr. Mozilo's personal advisor with the goal of achieving 'maximum opportunity' for Mr. Mozilo. The final contract was significantly more generous to Mr. Mozilo than Exequity originally recommended, according to the report."

If you are currently attempting to structure such deals for your organization, you may want to put yourself in the hypothetical situation of having to answer these questions on Capitol Hill.