Pay for performance: Does it really work?

by on June 22, 2009 · 0 Comment POSTED IN: HR Info Center

Pay for Performance Doesn’t Work if Raises Are The Key Motivator

If your company is like most, you believe in a pay for performance system– much as you believe in mom and apple pie. Who could argue with the notion that people should get paid more if they perform better? Actually, many HR thought leaders now say classic “pay for performance” approaches – often coupling base-pay increases with bonuses – have limitations, particularly if your goal is long-term retention. Let’s look at two such experts, Alfie Cohn and Gary Markle. 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. 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 for performance 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 year six he gets 9%. And then … in year seven, despite terrific results, 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.

You’ve probably guessed what happened. 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 for performance systems. 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: 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. And reward good people by:

  • Retaining them in hard times (appealing to their need for security).
  • Promoting them (appealing to their need for career advancement).
  • 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: 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 for performance – and for some areas, such as sales, it’s not an option. But there’s one powerful message in getting rid of pay for performance: 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 making pay for performance work and having 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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