Pay for Performance

A couple of years ago my company introduced performance related pay. This whas thought to be a modern way of rewarding better performing employees. The whole concept was implemented after careful consideration, with lots of training for management and clear corporate guidelines. Each year objectives should be set for each individual and the guidelines are very clear that these objectives should be SMART (specific, measurable, attainable, relevant and timely). Management is encouraged to continually follow up on these objectives and on a monthly basis people get a review session with their manager. 

Guess what? Performance related pay hasn't had the desired effect on overall performance and no effect on overall pay. Readers who are familiar with scientific research on this topic will not be surprised. Massachussetts Institute of Technology did a famous study that showed that performance related pay only gets the desired results when the objectives require no thinking and only execution of a task (e.g. putting things in a box). This study also stated that the effect of performance related pay on performance is negative in a complex environment. This really jumps out to me in my working environment. Management get their objectives (revenue + profit) set at the end of the year for the following year. And they get loads of tools to track their progress against the targets that were set. 

You can imagine what happens next. The job of management gets transformed into an activity where major efforts are spent in claiming turnover from other departments to get the desired profitability. The smarter managers do this when the budgets are set and tasks are distributed. Less sly managers will then make other managers lives miserable during the course of the year by trying to recoup revenue that was injustly taken away from them. All this results in no more revenue and lower profitability (because the task of managing is neglected). 

And then there is the effect on the employees. Because of the explicit link between pay and performance the impression is given that the more you earn, the better you are at your job. The reality, as you may imagine, is quite different. People's pay is much closer related to their ability to negotiate their salary and impress (or fool) management than it is to competence or performance. That is hard to explain when the corporate sing-song is pay for performance. And so people change employer to get a higher salary until they are in the salary bracket of the company (compared to peers) that matches their own assessment of their performance. 

If you get the impression I wrote this because I'm frustrated with my meagre pay, you would be wrong. I understood early on what it would take to get a decent salary and I negotiated well enough.