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

Every so often, I share my views on pay-for-performance 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.