Should Pay Be Linked to Performance?

March 12th, 2008 by hragitator | Posted in Compensation & Benefits, Performance Management |

One of the most commonly accepted and rarely questioned axioms in all the whole canon of Human Resources knowledge is that pay and performance should be linked. But is this really the best approach?

The logic is simple and that’s why this methodology is so widely ascribed to. It goes like this:

1. Employees are motivated by money.
2. Employees should focus on certain activities.
3. Paying employees for good performance in those activities will drive their behavior.

Let’s face it, this is the carrot and stick argument. Logically, it should work, and it does for very simple tasks that are rewarded immediately. However, most white collar workers have complex jobs and long spans between when they perform an activity and when they get rewarded. For this reason, most bonus programs really only reward or punish what was or wasn’t done, as opposed to driving performance.

Here are some other essentially unavoidable reasons that linking pay and performance usually fails:

• Objectives change mid-year so the employee is stuck with a useless goal
• Something outside of the employee’s control keeps them from reaching their objective
• Objectives are attained without the employee contributing correctly
• Objectives are set at such a distant line of sight that the employee can’t see how they make a difference
• Too many objectives are set, rendering each one individually insignificant
• A few good years creates an entitlement that serves as a punisher during downturns
• A few bad years creates cynicism when employees aren’t paid no matter how hard they work

Aside from all of the issues I’ve outlined above, the most important reason to avoid pay for performance programs is that it robs the employee of the intrinsic joy of doing their work. In fact, it directly interferes with the true intention of performance management. If an employee knows that their bonus is directly affected by their rating, they are much more likely to argue over criticisms and squabble over ratings.

When trying to give constructive feedback to an employee, it is almost impossible to get a person to accept that they need to improve when admitting to such also means admitting they should be paid less. Virtually no employee feels they should be paid less! If an employee’s financial well being is at stake, any manager will have a difficult time convincing them change is needed.

Now, you might say that the loss of income is a motivating factor to do better next time. I disagree. All you have done is de-motivated, depressed, frustrated, and angered that employee. How can you expect that person to bear down and try harder? Sure, there are a few that will, but the majority will spiral downward until they are managed out of the company.

Look at the perfect PM appraisal I proposed. No pay for performance, no ratings, just regular and consistent constructive feedback that the employee has no compelling reason to reject. Focus on increasing productivity!