Compensation has always been a powerful signal. But in 2026, it’s becoming something more: a credibility test for HR.
New research from McLean & Company suggests that while most HR teams understand pay is central to business performance, few feel they’re executing on it effectively. To address that gap, the firm has released updated guidance, Design a Purposeful Pay for Performance Program, aimed at helping HR leaders connect rewards more directly—and transparently—to results.
The timing is deliberate. Amid tighter budgets, persistent retention challenges, and increased scrutiny on workforce ROI, pay-for-performance (P4P) programs are under pressure to deliver measurable impact, not just annual merit cycles.
A Confidence Gap in Compensation Strategy
According to McLean & Company’s Management & Governance Diagnostic (2023–2025), 69% of HR departments say total compensation is important to achieving business and HR goals. Only 25% consider themselves “very effective” in this area.
That’s not a small delta. It’s a strategic vulnerability.
The disconnect reflects a broader trend across HR tech and talent strategy: organizations have invested heavily in engagement surveys, performance management platforms, and workforce analytics—but compensation design often remains rooted in legacy structures. In many cases, pay-for-performance is more tradition than strategy.
McLean & Company’s engagement data (2022–2025) adds further urgency. Employees satisfied with their total compensation are 1.8 times more likely to expect to stay with their employer over the next year. Meanwhile, those who believe they’ll be compensated fairly for exceeding expectations are 2.7 times more likely to be engaged.
In other words, when employees see a credible link between contribution and reward, they stick around—and they lean in.
“Pay for performance is never just about pay,” said Lexi Hambides, Director of HR Research & Advisory Services at McLean & Company. “It sends a powerful message about what the organization values, who it invests in, and how effort translates into opportunity.”
In a labor market still recalibrating after years of volatility, that message matters.
Why So Many P4P Programs Miss the Mark
If the business case is clear, why do so many pay-for-performance programs underdeliver?
The firm points to a handful of predictable friction points:
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One-size-fits-all design. Programs often ignore cultural context or financial realities, applying templated structures across vastly different business units.
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Budget compression. Limited merit pools make it difficult to meaningfully differentiate high performers from average contributors.
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Weak performance data. Without robust, trusted performance metrics, reward decisions feel arbitrary.
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Leadership inconsistency. Limited sponsorship or poor manager capability erodes trust in the system.
These aren’t new problems—but they’re becoming more visible. As pay transparency laws expand across regions and employees gain easier access to market salary data, opaque or poorly differentiated compensation models can quickly undermine engagement.
At the same time, HR leaders are being asked to defend compensation spend with sharper analytics. CFOs want clearer ROI. CEOs want alignment with strategic priorities. Employees want fairness.
That’s a tall order for what was once considered an administrative function.
A Three-Step Framework for Intentional Design
McLean & Company’s updated research centers on a practical, three-step framework designed to move pay-for-performance from reactive to intentional.
While the firm doesn’t position the guidance as a software solution, it does reflect a broader shift in the HR tech ecosystem: compensation strategy is increasingly intertwined with performance management systems, workforce planning tools, and analytics platforms.
The framework encourages HR leaders to:
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Clarify compensation philosophy. Define what the organization is truly rewarding—and why.
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Align rewards with strategic priorities. Ensure incentive structures reinforce business outcomes, not just individual metrics.
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Embed fairness and transparency. Strengthen leader capability and communication to build trust in the system.
A key design tension highlighted in the research is the balance between base pay and variable pay.
Base pay signals long-term investment and stability—but limits financial flexibility. Variable pay introduces agility and stronger differentiation—but reduces predictability for employees. The optimal mix depends on organizational strategy, risk tolerance, and culture.
For example, high-growth firms in competitive tech markets may lean more heavily into variable incentives tied to innovation or revenue milestones. Mature organizations in regulated industries may favor stability and incremental differentiation.
The message is clear: structure isn’t neutral. It shapes behavior.
Compensation as a Retention Strategy
Perhaps the most compelling takeaway from the research is its explicit link between compensation design and retention.
In an era where voluntary turnover has cooled from pandemic-era highs but remains structurally elevated in key sectors, engagement is once again the retention battleground. And engagement, the data suggests, is tightly linked to perceived fairness.
Employees don’t just want higher pay. They want predictable, transparent logic behind how pay decisions are made.
This dynamic aligns with broader workforce trends. According to multiple industry surveys over the past two years, employees increasingly rank “fair pay” and “clear growth pathways” alongside flexibility and purpose as key drivers of loyalty.
Pay-for-performance programs, when executed thoughtfully, can reinforce all three.
But when executed poorly, they amplify distrust.
Beyond Administration to Strategic Impact
One of the sharper observations in McLean & Company’s findings is that many HR teams still treat compensation as a compliance and process function rather than a strategic lever.
That mindset is increasingly untenable.
As organizations digitize performance reviews, implement AI-assisted talent analytics, and rethink workforce planning models, compensation becomes the connective tissue linking performance data to tangible outcomes.
A well-designed P4P model can:
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Reinforce strategic pivots.
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Signal cultural priorities.
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Reward innovation and adaptability.
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Provide measurable ROI on performance management investments.
Conversely, a misaligned model can quietly undermine even the best engagement initiatives.
The firm positions its updated research as a tool to help HR leaders elevate compensation from operational necessity to business driver—supported by workshops such as its Performance Management Workshop and Strategic HR Essentials program.
For HR tech vendors, the implications are equally clear. As clients demand tighter alignment between performance systems and reward structures, platforms that integrate compensation planning with real-time performance insights may gain an edge.
The Bigger Picture for HR Leaders
If there’s a throughline in the data, it’s this: pay-for-performance isn’t broken—but it’s often under-designed.
In an environment defined by cost discipline and performance accountability, compensation strategy can no longer rely on incremental tweaks. It requires intentional architecture.
HR leaders who close the gap between belief (“compensation is critical”) and execution (“we’re effective at it”) stand to gain not only stronger engagement metrics but measurable retention outcomes.
And in a market where talent strategy is under constant scrutiny, that’s a competitive advantage worth paying for.
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