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Pay for Performance is Dead … almost

Posted by Amy Wilson on March 2, 2010


No, this is not an ironic critique of current pay budgets or of corporate performance, in general, in the current economy.  Rather, I am seeing several signals suggesting that the pay for performance model that we’ve touted in the past might need a serious makeover.

First, there’s the research in behavioral economics.  In Drive, Daniel Pink explains how the old operating system of motivation (carrots and sticks) isn’t compatible with contemporary business.  In the industrial age, the focus was on routinizing tasks and getting them done quicker and cheaper.  Meanwhile, in today’s creative age, rewards can transform interesting work into drudgery.  The reward itself can signal to the individual that the work is not enjoyable.  It stamps out the inherent intrinsic motivation and creates reward addicts.  With the problems of today’s world, we need more creative and strategic workers, not cogs in a machine.

In Linchpin, Seth Godin also describes this new world of work and how today’s organizations need people who bring humanity, connection, and art to their work.

Meanwhile, Daniel Kahneman (known as the inventor of behavioral economics) recently spoke at TED about happiness.  He had some good data that indicates a certain threshold after which money does not affect happiness.  And it is not particularly high.

Second, there’s a push in many leading organizations to re-frame the performance process – focusing on developing individuals for the future, rather than rewarding the past.  For example, many of the customers I speak with are purposely separating performance discussions from compensation discussions.  Performance appraisals of the past (tied to a score and dollar amount) have been found to be de-motivating and not particularly good at increasing performance (which is the point, right?).

So what does all this mean? Should we eliminate the compensation function altogether?  Figure out fair market pay and ignore the rest?

No, but we need to rethink our “signals” with regards to compensation.  Here are a few suggestions:

  • Let’s make sure we’re not disincenting our talent via compensation.  We need to figure out what that threshold (happiness/engagement) is and make sure everyone providing any value is paid to that level.
  • Let’s only pay performance-based incentives for activities that we deem routinized and, frankly, unappealing (yet are necessary and important).  We need to be honest about what the incentive signals and what kind of behavior will result.
  • Let’s reward creative and “linchpin” behavior with more opportunities and lots of appreciation.

Have I gone mad?  Maybe … but it’s hard to ignore some of these signs.  Fire back with opposing arguments.

14 Responses to “Pay for Performance is Dead … almost”

  1. Nice post. I would add that happiness has been proven to be a relative measure not absolute (people are happier earning less in total if they earn more than others) so it will be a constantly moving target based on what others have versus what I have.

    Also, while Pink’s book and theory is interesting – it is difficult if not impossible to apply in real business environments and a strong mix of “freedom” and targeted and well-designed influence programs are needed to drive execution. If you followed everything in Pink’s book to the letter you’d have a great creative and interesting place to work with no real work getting done.

    Pay for performance is really about measuring progress (which has been shown to drive engagement in a task) – and anytime you inject income/compensation/money into a work function it changes the way in which people look at it. They end up doing the math to determine “how much is my time/effort worth” versus doing it to achieve a goal.

    My fear is that people in HR and Compensation will take Pink’s point of view and assume it is gospel. The reality is much more nuanced and messy than “creative = no incentives, we are ALL in creative jobs, therefore, no incentives.”

    I too think Pay for Performance must change but for different reasons. We need to provide more ways to measure progress within a company – pay is only one – but when it is the only one it is the one everyone will focus on.

    • Amy Wilson said

      Paul – thanks so much for your thoughtful insight. These are great points about the nuances of pay and the dangers of reading too much into theory. Good news is the companies I speak with get that and are steering in the right direction.

  2. I found myself nodding in agreement with the research, but still couldn’t grasp the concept of a workplace where there wasn’t pay for performance. Weird. I should know better, as I am a stay at home dad, and I definitely am not part of any pay for performance (luckily).

  3. Meg Bear said

    Of course, pay [and motivation] is very personal, but for me I find that pay has downside but not much upside. IOW if I feel I’m not being fairly compensated I’ll feel badly but if you only give me compensation and nothing else that would not be helpful either.

    Being trusted with interesting work and recognized for my unique contribution go a lot further to making me happy. I think getting the mix right is critical. I think it’s really the backward vs. forward looking part — a new opportunity has more upside leverage. At least that’s how it makes me feel.

  4. Karla said

    I enjoyed reading this and it made me think. The down sides of pay for performance are apparent, but how do we replace that and still maintain effective driving toward goals? This part stands out to me -“Let’s reward creative and “linchpin” behavior with more opportunities and lots of appreciation”. The problem being that of measurement. When the idea is to promote inventiveness and creative thinking, it is hard to create measurement for what we don’t know is coming. Taking the subjective and trying to objectify it is the hard part. How does a manager differenciate between workers when trying to allocate a limited amount of resources (whether that be money, travel, training or any other incentive) and the measures are subjective in nature? And how do that do that without missing the “moving target based on what others have versus what I have” that Paul mentioned?

    Thanks Amy for the food for thought :).

    • Karla – you’re right – innovation isn’t a “hard measure” but there are specific behaviors that people exhibit when trying to be innovative. That is what you want to reward. Things like – “do they research outside their field of focus?” do they “engage with other departments to understand their points of view” – in other words – focus on the behaviors not the outcomes.

      Most managers will know “innovation when they see it.” So when you see it find out the process the person went through to get to the “innovation.” What did they do differently – key is the word “do.” Find out the behaviors and structure rewards and recognition around those things. Remember – pay for performance doesn’t have to be related to outcomes.

  5. Great post, Amy. I have two related thoughts.

    1. I agree it’s hard to imagine a world without pay for performance, in part because dissatisfaction with pay and rewards consistently comes up in engagement/job satisfaction surveys. It seems counterintuitive to say that it’s not important when employees constantly say that it is. But people often have a hard time knowing their own true preferences and, to your point, their dissatisfaction with pay and rewards may actually be a symptom of deeper dissatisfaction with their job.

    2. I like Kahneman’s research in this area, but I think there is opportunity for him to segment his analysis by income or relative income level. Other social science research makes me believe that the ability of money to motivate and make people happy is partly a function of how much you currently have or are making relative to peers. So maybe pay-for-performance makes a bigger difference at lower pay grades than at higher ones?

    • Mike – one thing to keep in mind is that most people will become “income adjusted” meaning they will work to the point that they are “comfortable.” That’s where things besides money come into play ie: extra responsibility, control over work environment, etc.

  6. First off, kudos to Paul Herbert for engaging so much in this conversation! You have such a lot to contribute here. For folks who don’t know, Paul has a tremendous blog at http://www.i2i-align.com/. “Nuanced” is a nice way to put Pay for Performance ;-)

    I like what Paul says about “income adjusted” and what that implies if *all* you have to offer *is* pay. It shows that pay isn’t unimportant, as Mike points out, but has limits in effectiveness (along with plenty of downside as Karla pointed out). In addition, it is relative in its impact, which can confuse attempts to model how much performance you get for a given increase in pay.

    Add that individuals can have inherently very different views of the importance of pay relative to other things in their life, and it’s very difficult to see how a “one size fits all” approach can deliver effective results. It may be simpler (and may even suffice for some industries and roles), but can it really keep you competitive when you end up losing pivotal talent you could otherwise have kept while overpaying for other talent? Pay for performance needs to be viewed through the lens of a differentiated workforce strategy that connects the impact talent has on business results.

  7. Amy Wilson said

    I admit that I am struggling with this concept myself … but I just wonder if we should consider if pay differentiation itself is really doing more harm than good? We have realized in the past that there can be team motivation issues over not getting paid when others are getting paid, the subjective nature of the payments, etc. But this research into motivation brings a whole other level to consider. Perhaps, we are not even motivating the star players! If the whole point of pay differentiation is to incent star performers to do even more great work, and we’re not actually doing that … isn’t that a problem?

  8. […] Wilson directs Pay for Performance is Dead…almost posted at TalentedApps, saying, “This post covers several signals suggesting that the pay for […]

  9. czander said

    Edward Deming writing, about 14 points needed to transform management and the corporation, believed performance appraisal or pay for performance were counterproductive and simply bad management. In his point #3 called – Evaluation of Performance, Merit Rating, or Annual Review- and he proposed their eradication. Deming writes, “The performance appraisal nourishes short-term performance, annihilates long-term planning, builds fear, demolishes teamwork, nourishes rivalry and politics… it leaves people bitter, crushed, bruised, battered, desolate, despondent, dejected, feeling inferior, some even depressed, unfit for work for weeks after receipt of rating, unable to comprehend why they are inferior. It is unfair, as it ascribes to the people in a group differences that may be caused totally by the system that they work in.” In other words, commitment is destroyed.
    It is commonly understood that performance reviews, pay for performance, and incentive systems have little to do with the motivation, but they are successful in punishing employees and rupturing relationships. Many studies point out that rewards actually undermine the very process they are intended to enhance. In agreement, Edward Deming believed that extrinsic motivators were a fallacy. When asked the question, “Is money a motivator?” he replied, “It is not!” He believed the same applies to all forms of extrinsic motivators, they do not motivate. When it comes to intrinsic motivation the relationship between reward and motivation is more complex. For example, offering rewards for easy tasks or just completing a task may lower intrinsic motivation. It is a mistake to assume that employees are motivated in predictable ways by differential rewards and punishments.

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