Pay based on employee performance reviews doesn't work

by on June 2, 2009 · 0 Comment POSTED IN: HR Info Center

Positive employee performance reviews don’t always correlate to a big raise

If your company is like most, you believe in rewarding performance – much as you believe in mom and apple pie. Who could argue with the notion that people should get paid more if they have better employee performance reviews?

Actually, many HR thought leaders now say classic “pay for performance” approaches – often coupling base-pay increases with bonuses to employee performance reviews – have limitations, particularly if your goal is long-term retention.

Alfie Cohn, author of “Punished by Rewards,” takes an extreme approach, arguing that people aren’t motivated by extrinsic rewards. What really motivates people is “the work,” he says. Gary Markle’s book, “Catalytic Coaching,” offers examples of how well-intentioned efforts to reward people for the quality of their work can backfire. His ideas resonate with anyone who has tried to motivate people over the long term simply by raising their pay.

Hitting the pay ceiling

Markle tells the story of a top performer who joins a company at the low end of the pay range for his position. He works hard. A year later he gets a 5% raise and is delighted. In subsequent years he continues getting well-above-average raises linked to his well-above-average results in his employee performance reviews. In year six he gets 9%.

In his seventh year, despite terrific results on his employee performance reviews, he gets a 5% raise. The following year he gets just 3%. He’s furious. His wife is furious. They both wonder why the company that valued him so much for all those years is suddenly so unappreciative.

The employee approached the top of his salary band. Since the company couldn’t afford to pay above-market salaries, it had no choice but to put the brakes on the employee’s raises.

Markle says this inevitable result is what’s wrong with many pay based on employee performance reviews. They train people to define success based on the size of their raise. Ultimately, the unhappiest employees are those who come in at below-market salaries and are quickly accelerated – i.e., conditioned to believe that hard work always leads to higher pay.

Markle’s alternative to pay based on employee performance reviews:

First of all, pay people market rates to begin with, so you never have to accelerate them quickly and get their expectations out of whack.
Second, go ahead and use performance bonuses if they fit for your company, but focus on total compensation, conditioning people to see raises as a means of coping with inflation.

Reward good people by:

  1. Retaining them in hard times (appealing to their need for security).
  2. Promoting them (appealing to their need for career advancement).
  3. Giving them plum assignments (appealing to their need for recognition).

Why people really come to work
Cohn’s research shows that extrinsic rewards such as money don’t motivate people to produce more or achieve excellence. In fact he says punishment and rewards are two sides of the same coin. Both are manipulative and punitive, implying “Do this or you’ll get that,” an approach that shifts the focus away from the “this” (the work itself) and places it on the “that” (money).

People start thinking, “If they have to bribe me to do this job, it must be something I don’t want to do.”
Cohn argues that endlessly tweaking the particulars to find the right reward formula is like treating alcoholism by switching from vodka to gin.

Cohn’s alternative to employee performance reviews:
Like Markle, he recommends paying people well and then doing everything you can to make them forget about money, which just distracts people from the things that really matter. Cohn’s solution identifies what he calls the “three C’s” of quality:

Choice: Get workers to participate in making decisions about what they do.

Collaboration: Get workers to work together in effective teams.

Content: Give people good, meaningful work to do.

Doing these things, Cohn argues, is much more difficult than dangling rewards and pushing money in people’s faces to get them to do what you want.

You can’t snap your fingers and do away with pay based on employee performance reviews – and for some areas, such as sales, it’s not an option. But there’s one powerful message in the anti-pay-for-performance mindset:

You don’t want employees defining success by the size of their pay. You do want them to feel successful because the meaningful work they perform fills them with a sense of mission and purpose. That’s the key to high performance and great retention.

Sources: Adapted from material in “Catalytic Coaching: The End of the Performance Review,” by Gary Markle, Quorum books; and “Punished by Rewards,” by Alfie Cohn, Houghton Mifflin. HR 4.06

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