The albatross around the neck of reformers in performance management is the link to pay raises. This unholy marriage between pay and performance is so deeply rooted in business philosophy that it is painful to think about the surgical procedure necessary to separate them. Paying somebody for their actual accomplishments sounds good to company management and to human resources managers that are trying to balance the needs of people with the needs of the company. The truth is that it is a beautiful concept that has become a sacred tenet in management. There is only one problemâ€¦ it doesnâ€™t work. It never was based on data but only on management theory and high sounding, righteous, arbitrary justification.
We know from surveying CEOâ€™s, HR experts and employees that annual performance reviews leave a lot to be desired. The optimal feedback according to Achievers Intelligence: Insight Into Todayâ€™s Workforce report is immediate, on-the-spot recognition or correction. Manageable alternatives for actually scheduling and recording performance data would be weekly or no less than monthly reviews. If annual performance reviews are the least desirable method, why do we still do it? Well, first of all it is hard to do if it is tied to some sort of merit pay scheme. Difficult tasks will usually result in one of two choices: Pretend the problem is not all that bad or take the bull by the horn and plot out a methodology to fix it.
What is wrong with pay for performance?
- The incentive for work should be something other than money. There are a number of studies that can show that money is a major motivational factor for working, but there is scant evidence that paying more money makes people work harder. There have also been numerous experiments that show paying people for doing things that they actually enjoy doing can actually decrease engagement. It is impossible to pay to increase passion or work ethic. Hiring motivated people demands that we provide more job satisfaction and growth opportunities than monetary rewards.
- Measuring performance is an inaccurate process. Setting goals and objectives to be ticked off of a list measures nothing more than a best guess at what will be important at some future time. The best workers will apply their own initiative and invention to a process and that is totally unpredictable, unmeasurable, and outside of the bounds of a scheduled appraisal. Risk takers are more likely to add value to their work, a desirable element, but this exposes them to a higher likelihood of failure. Allotting a portion of the pay raise budget using such an inaccurate process is not paying for performance and may actually encourage simple soldiering.
- Managers and employees can game the system. Most people caught in a compensation system based on performance learn early to under-promise and over-deliver. There is a temptation to cook the books, fudge the numbers or be otherwise â€œslightlyâ€ dishonest to achieve targets. Such tactics totally dilute any useful management information that could have been obtained. Managers may be tempted to look the other way rather than give bad news unless some other factor causes them to impose discipline using performance as the excuse. This highlights how totally subjective is the method for determining performance and therefore undermining the reason for pay differences.
What alternative methods would work?
- Start with the hiring process. Take money off of the table. Build a selection system that attracts candidates who are truly interested in the work and not just the monetary rewards. Previous accomplishments are an indicator of future potential, but selection cannot be based on the past alone. The requisite skill set is only a minimum requirement. A progressive resume showing increasing responsibility and authority is a sign that there is ambition and a tenacious work ethic. The ability to grasp complex ideas and solve problems is an indicator of intelligence. The passion for work is the glue that binds work ethic and intelligence into a productive employee.
- Adopt a market based foundation for a sound compensation plan. This is of importance for both recruiting and retention. Surveying the marketplace to learn where various jobs are compensated in the current economy insures that employees are paid competitively. Creating and maintaining a culture of fairness also takes away the greener grass syndrome that lures people to leave strictly for money. Replacing a variable compensation system does not mean that there is a military-like hierarchy, but it does require a greater diligence in insuring that pay differentials are not arbitrary.
- Reward potential rather than performance. This does not mean trading one subjective system for another. It is important to reward employees with new challenges that push their boundaries to solve new problems and then adjust pay accordingly. Potential is not a factor of age or time-in-grade, so the idea that younger employees have to pay their dues before moving upward is a relic. Anyone with the experience and maturity as proven by accomplishments in solving the tough problems should be pushed to the next level if they are willing to accept the risk.
- Punctuate employeeâ€™s lives with alternative incentives. Soldiers do not risk their lives in combat for the $5.00 piece of medal received in tribute. There is something inside of every person that drives them to excel. Spot monetary awards of a token nature are a nice gesture, but the recognition publicly for their accomplishments means more. Celebrate their contribution not only as a reward but as an example to others that this is a culture of appreciation and gratitude.
As always, this is only the beginning until the experiment in fixing broken systems is tested in the laboratory of actual business practice. Even though there is apparently a common universal problem, no two situations are alike and the opportunity for HR professionals to reach their next level in potential has never been so prominent.
Related articles from Making HR Happen:
- Hey Boss! You Missed More Than an Annual Review
- Performance Management Part I â€“ The Basics
- Performance Management Part II â€“ Variations on the Basics
- Performance Management Part III â€“ What Ifâ€™s, What Elseâ€™s and What Next