Tag Archives: merit pay

Supporting Team-Based Work

Many of the companies I work with want the benefit of the team effect in software development. The managers in these companies recognize the enormous benefits teams provide to the company–creativity, engagement, learning.

However, in many of these companies, the HR systems focus only on individual accomplishment. Individual goals, individual bonuses and merit-pay processes cause real damage when the desired behavior is collaboration and team work. I’ve talked to managers who spend the year building up teams, only to see their work undone by the review and ranking process.

In a small company, managers have the ability to directly change the goal, bonus, and pay systems. In large companies, or in companies where the software group is only one division, changing those policy may seem impossible.

Until you persuade HR to change to more team-focused strategy, take these steps to minimize competitive focus and amplify the emphasis on shared goals.

Amplify the Importance of Team

Make the expectation for teamwork behaviors explicit. Make team performance a significant portion of each team members performance expectation.  By significant, I mean 60% or more. Anything less communicates that teamwork is “nice to have,” but not essential. When people must rely on others to achieve a useful goal, tie the success together in performance expectations.

Dampen the Race for Rankings

Minimize the competitive focus by reducing stratification. Rather than have five or more ratings, use only three categories.

The top category is for people who are truly exceptional. They may out-perform the system, make an extraordinary contribution on a project, or stand out in some other way.  In most organizations, there aren’t many of these people, and most people know who they are and agree on who they are.

The bottom category is likewise small and for people who are exceptional. This is for people who clearly are unable to perform, due to lack of skills, poor fit for the job or some other reason. Note: Before you put someone in this category, check the manager’s contribution to the problem. Most performance problems are not the sole fault of the employee. When an employee is in the wrong job, or clearly lacks the skills, that points to problem with the hiring process, not the person. Of course, it doesn’t make sense to keep someone in a job they cannot do. But let’s not blame the individual when a management process has failed.

The middle category is the big one–for the people who are doing their jobs well and performing within the bounds of the system. Many companies waste an enormous amount of managers’ time arriving at fine-grained but spurious distinctions between employees contribution. Such distinctions are meaningless in collaborative and interdependent work. Managers’ time would be better spent working to improve the system so everyone does better.

A three-tier strategy based on normal variation and exceptions reduces the unhealthy effects of ranking individuals against each other. As a bonus, it frees up a great deal of time that managers would otherwise spend on suspect differentiations.

Don’t Treat People as Fungible

Don’t waste time comparing people as part of the evaluation. Comparing people within a team or group fosters division and competition. Comparing people across teams or functions is irrelevant–except when considering promotions.

Emphasize Interdependent and Collaborative Work

Eliminate individual performance bonuses. Some companies give team bonuses to recognize a team that has solved a particularly difficult problem, saved the company a huge amount of money, or launched a successful product. Since the bonus goes to the team, in most cases, the team members divide it equally.

Even without formal team bonuses, you can use the pot of money HR allocates for individual bonuses in this way.

Aim for Policies that Focus Improving the Organization

In the long run, consider some form of profit sharing or gain sharing based on the over-all performance of the department. Couple this with a clear emphasis on improving team and system performance and meeting business goals. This reduces the likelihood that people will skew their effort towards meeting individual goals at the expense of unit wide business goals.

Take a Stand

Many managers tell me that HR forces them to act out harmful policies related to annual evaluations, ratings, and rankings. HR is there to support performance, not disrupt it. Talk to them about the detrimental effects you are seeing. Share the research. Decline to participate in the ranking mess. If HR insists, distance yourself from the mess and have an HR manager communicate the ratings/rankings.

I have talked to many managers who have opted out of the rating and ranking madness and none of them have been fired. And several of them–through their action–started the conversation and change towards policies that support rather than hinder team work.

The Pay Off in Merit Pay (Not)

If you’ve been reading this blog for a while, you know how I feel about compensation systems that claim to motivate better performance with differential pay.

For example,

A Compensation Story in 2006,

It’s What We Know That Ain’t So and

Pay for Performance and Why it Doesn’t Really Work in 2007

So of course, I was interested when I came across Where’s the Merit-Pay Payoff? by Fay Hansen on WorkforceWeek.com. (requires free registration).

A few snippets:

The seemingly self-evident premise underlying merit pay and other individual performance-based pay plans is that they produce higher employee and organizational performance. Most companies, however, do not test the actual impact of performance-based rewards on employee behaviors and financial results. The most comprehensive empirical studies flow from the academic world, where evidence is mounting that the assumptions underlying individual performance-based pay programs are wrong.

“The evidence is overwhelming that individual pay for performance does not improve organizational performance except in very limited cases.”
—Jeffrey Pfeffer, professor, Stanford University Graduate School of Business

“Effective management is a system, not a pay plan. The mistake is that companies try to solve all their problems with pay.”
—Jeffrey Pfeffer. professor, Stanford University Graduate School of Business

Pfeffer notes the existing evidence points to group bonuses, profit sharing and gain sharing, which is a form of profit sharing, as more effective forms of performance-based pay than merit pay or individual incentives. “Group plans are more collective and recognize the interdependent nature of work today,” he says. “Most employees look at their total compensation and want to see that they share in the success of the organization.”

This is particularly germane to organizations that are asking people to work collaboratively in teams. Yes, we do pay individuals. There are rational ways to do that without so-called merit raises. I’m glad to see that group bonuses and profit sharing are starting to come up in the conversation.

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I will address the top concerns that come up when I write/talk about this topic preemptively.

1. I am not suggesting that everyone be paid the same salary. Skills, experience, domain knowledge and the current market are all considerations in setting salary. The key is to pay people equitably (which is very different from “pay equally”).

2. I am not suggesting that everyone’s skills and performance are equal. Of course people have different skill levels and perform differently. Most companies recognize this with salary bands.

3. I am not saying that teams should have a team salary. Salaries are paid to individuals… though I suppose an independent team could contract jointly, and then decide how to allocate pay within their group. But that’s a different topic.

4. I am not saying people don’t need feedback on their performance at work. People need feedback–which is information about performance, not evaluation–on a frequent basis. The more we can design systems where the feedback comes from the work, the better (e.g., build lights, green bar/red bar test frames). Peer feedback and feedback from managers are crucial for improving performance.

5. I am not saying that people who aren’t actually working should continue on the payroll. But any manager who needs a pay-for-performance system with ratings and rankings to figure this out is in big trouble.

I think these are some of the things people fear when they think about removing merit pay. There are other rational pay systems… but they aren’t as wide spread, so few people know about them. More on those, later, perhaps.

Pay for Performance (and why it doesn’t really work)

Every so often, I share my views on payforperformance and annual performance appraisals on this blog. My experience is that pay-for-performance and annual performance appraisals–contrary to popular belief–actually hurt performance and results, rather than driving higher performance.

So I was interested to learn, via Bob Sutton’s blog, that Jeffrey Pfeffer (co-author of Hard Facts, Dangerous Half-Truths And Total Nonsense: Profiting From Evidence-Based Management and author of several other books on management)was called to testify before Congress on the matter of pay-for-performance.

Pfeffer’s testimony walks through the assumptions underlying pay-for-performance,

  • Money is an important motivator.
  • Motivation is the issue for enhancing performance.
  • Individual performance can be reliably and unambiguously assessed.
  • Individual, rather than collective, rewards are important because of the need to overcome free-riding problems.
  • Differentiation in individual rewards, a necessary and frequently explicit consequence of individual pay-for-performance systems, leads to higher unit performance.
  • ….and lays out the evidence related to those assumptions. (They don’t hold true when you actually look at the evidence.)

    He also points out that when the explicit and implicit message is that people (and their contributions) aren’t valued, tweaking the compensation system won’t overcome the depressive effects on performance.

    If the senior managers at a company really want to improve performance, tinkering with the pay system isn’t the way to go about it. Addressing the underlying culture and quality of management is.

    Although the list of high commitment or high performance work practices differs slightly among authors and studies, most such lists include: a) sustained investment in training and development, including job rotation, both formal and on-the-job training, and a tendency to promote from within as a consequence of the successful internal development of skill and people; b) an egalitarian culture in which formal status distinctions are downplayed, salary differences across levels are less than in the general economy, and in which people feel as if their contributions are important and valued; c) delegation of decision making responsibility so that skilled and developed people can actually use their gifts and skills to make real decisions; d) high pay to reduce turnover and attract the best people, coupled with rewards that share organizational success with its members; and e) employment security and a policy of mutual commitment, so that the workforce does not fear for the outcomes of events over which it has no control and instead, feels reciprocally committed to the employer.

    He ends his testimony with this statement:

    We should implement what we know, rather than what we hope, or wish, might be true.

    Read the full testimony here.

    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.