The Truth About Paying for Performance

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One of the great myths of corporate life is that incentive pay leads to better performance.  Corporate leaders often speak with great moral conviction of creating pay for performance cultures that only reward people when they meet performance expectations.  The logic suggests that if organizations provide a big enough carrot, people will work harder to achieve the results required to get it.  The organization wins because they get the best effort of employees for an optimized level of expenditure.  Employees win because they are rewarded for their effort.

Who can argue with that?

The problem, however, is that it does not really work that way.  The truth about the pay-performance relationship is that the same reward structure can have positive or negative effects depending on whether rewards are distributed based upon performance or politics.  As you might expect, when pay accurately reflects actual performance, incentives can lead to greater productivity.  But when pay in any way reflects organizational politics, the results are the opposite.

Unfortunately, political influences tend to creep into compensation systems because organizations often rely on subjective ratings for their measure of employee performance.  Even when performance criteria are modified with standards and elaborate descriptions of goals, ratings are still subjective because the interdependencies in most work environments make it virtually impossible to establish indisputable cause and effect relationships between individual performance and results.  And as Dan Pink implies in the above video, there are very few jobs in today’s economy that are so isolated and routine that they can be evaluated solely on the basis of objective measures.

So what’s the answer?  Navigate the imperfection.  That likely does not provide solace to those who want certainty, but it offers a solution that can strengthen the relationship between managers and employees.  Instead of hiding behind the lie of pure pay for performance systems, own the imperfection and teach work groups, managers and employees to have better ongoing conversations about how to achieve results.  Instead of hanging firm performance on pay systems that may work against motivation, create an environment that nurtures intrinsic sources of motivation, such as autonomy, mastery and purpose.

Stop over engineering pay systems hoping for a miracle and remember that pay has its place.  It’s just not first place.

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