A Compensation Story

I found this snippet by Dick Dauphinais of the Herman Group via the Dear Workforce email newsletter:

Compensation experts for years have preached that discussions on performance with employees should not be linked to pay discussions, although most companies ignore this advice.

I am not a fan of using employees’ performance ratings or scores as a basis for pay decisions. Employees should know at all times how well they are performing and also need to see periodic adjustments to their base pay that keep wages in line with their peers in the marketplace (we are not talking about a cost-of-living adjustment, though).

I’m not a fan of using performance ratings or scores as a basis for pay decisions, either.

Contrary to popular belief, performance-linked pay isn’t a huge motivator for most people, and in fact it’s more often a demotivator.

Here’s an example:

My friend Jennifer is a pretty driven person. Her standards for her own performance are high, and she’s allergic to sloth, slovenliness, and slacking. You can count on Jennifer to do the job right–and then some.

So when Jennifer had her annual performance review, she received a top ranking.

Then she got her raise… a piddly 1.5%. Her manager told her it was a high raise for Jennifer’s salary range. Jennifer didn’t feel great about it–it seemed sort of strange that her ranking was high, and yet her raise was so small–but accepted the rationale.

….until she found out that two other people in the group (and in the same job grade) had received 5% raises. One of them was relatively new, and still needed a lot of guidance and help. The other scrapped by doing as little as possible.

After learning how the raises were parceled out, Jennifer stopped going above and beyond. She’s not slacking off, but she’s not doing as much as she was, either. “What’s the point?” she said. “No matter how much I do, my raise will be less than barely competent people who are at the bottom of the salary range. Where’s the fairness in that?”

Jennifer’s company has managed to take someone inately inclined to go beyond the call of duty and actually deminished her desire to contribute.

Mr. Dauphinais goes on to say,

In addition, your pay programs should focus on company-established business goals and the professional development of employees by improving their skill sets. Pay programs that fit into this category include gain-sharing, profit-sharing, skills-based pay and milestone pay (common in project work), as well as other custom programs that emphasize sharing financial success with all or most employees based on meeting certain milestones.

The purpose of a pay system is to attract and retain employees. To do that, people need to feel that they are being paid a fair rate and that they are treated equitably. (Notice I didn’t say “treated equally.” Equal treatment often is not equitable.) The thing you don’t want is for pay rate and raises to be a distracter or a dissatisfier.

Most of the performance ranking/rating linked pay systems I see backfire. Sometimes in the way the one at Jennifer’s company does, sometimes by creating cutthroat competition.

It’s worth looking at how the pay systems in your company works. You may not be able to change it, but you may be able to mitigate the demotivating affects on the people who report to you.