A pay for performance system is one where people receive monetary rewards based on the value they provide to the company. The more value you provide, the more you are paid. The assumption is people will provide more value if they are financially incented based on their contributions. Adopting a pay for performance mindset, while generally a good idea, can over-simplify what business owners truly want and what actually motivates employees. To illustrate this, consider the following four pay for performance cultures in order of best to worst to somewhere in-between.
The best scenario: Performance without pay. Business owners don’t actually want to pay for performance. What they ideally want is performance without having to pay. But most employees are not willing to accept this proposition. We rightfully expect to be paid for what we contribute. Nevertheless, it is possible to inspire people to achieve high levels of performance without focusing on pay. Volunteer organizations do this all the time. There are a lot of things that motivate people. The motivational value of pay varies depending on the type of job and employee, and business leaders who use pay as the sole tool for motivating employees risk adopting a very expensive and marginally effective leadership approach.
The worst scenario: Pay for poor performance. The worst case scenario for a business occurs when employees are rewarded for doing things that undermine company performance. This occurs more often than companies would like to admit, particularly in companies whose managers have to comply with restrictive personnel policies, rules, and regulations. Rewarding poor performance encourages counterproductive behavior and destroys the motivation of high performers. High performers dislike it when they do not receive any sense of recognition or rewards for their contributions. But they hate it when they see rewards going to poorer performing colleagues.
A lousy scenario: Performance only for pay. One of the problems with creating a direct link between pay and performance is some people will never feel they are getting paid enough. No matter how much pay these people receive for doing something, over time they always seem to want more. Payouts can quickly switch from being a reward to being an expectation. Today’s financial bonus is tomorrow’s entitlement. Once this happens, pay ceases to be a motivator and becomes a source of dissatisfaction.
The pragmatic scenario: Performance influences but does not completely determine . Research on productivity, fairness, and motivation indicates that there should be a positive relationship between how much people are paid and how much they contribute to the company. But the relationship between pay and performance does not need to be perfect to be effective. Many things influence pay levels beyond individual performance (e.g., overall company financials). Conversely, pay is only one of many things that influence performance. Company’s should create a link between performance and pay, but should not overemphasize pay as the only reason why employees should seek to perform at higher levels.
Establishing links between pay and performance does tend to increase productivity. But it is not just the promise of pay that drives the productivity. When you link pay to performance, employees and managers get much more serious around defining what they mean by “performance”. And clearly defining performance expectations drives all kinds of benefits for increasing workforce productivity, regardless of pay levels.
Note: This blog is an excerpt from my book Common Sense Talent Management: using strategic human resources to improve company performance.