Disconnecting Pay from Performance - Are You Crazy?!

As parents of young kids, we whip them into a frenzy about Christmas by talking about toys, candy, Santa, presents, cake, Santa, toys, and more toys. Then, when our kids get rabidly excited about "toys, toys, toys!" we're shocked and appalled. We self-righteously blame the media for making Christmas so commercial without recognizing our role in creating these little monster-consumers. We also unknowingly do exactly the same thing in business management.

We want our employees to be engaged in the work, to contribute their energy and ideas, and to be internally motivated to provide excellent service and get satisfaction from a job well done. Then, we constantly distract them by making their pay conditional, by holding up bonus plans and trying to get them excited about incentive pay, about perks, about contests, about quotas, about bonuses! And, for some reason, we're then surprised and annoyed when our employees constantly think about whether they're getting paid enough for the work they do.

Disconnecting pay from performance IS a controversial topic, and I'm sure I won't do it justice, but let's take a look at it all the same.

"Every board in corporate America is an advocate of pay for performance," says Hewitt Associates.
"Pay-for-performance needs to be embedded in your culture," says Workscape Institute.

Pay-for-performance is almost universally assumed to be a good thing, especially among HR professionals and HR consultants. It's touted as an effective motivator, a solution for reducing costs, and a way to entice workers to greater achievements. You probably have, or have considered implementing, a pay-for-performance system in your organization. You probably believe that people will work harder, faster, and smarter when their rewards are based on their results.

Yet research on human motivation clearly shows that intrinsic motivation, the personal, internal drive to do a good job, is the best and only true motivator. Unlike mice and chickens and dogs, research with humans shows that extrinsic motivators (like cookies, gold stars, prizes, bonuses, perks, praise) actually damage our intrinsic motivation AND (here's the surprise...) produce inferior results. In the short term, we'll work for a perk, but in the medium and long term, we'll end up only working for perks, destroying our innate desire to do good work and master new skills.

Throughout the corporate world, and more commonly in government, health care and education, managers and HR departments rely extensively on extrinsic motivation systems like pay-for-performance in attempts to get people working. Yet the research actually points us in a different direction, towards disconnecting pay from performance. Scary stuff kids!

If you think about it, there are basically three ways to reward people for doing a task. (I'm talking here about conditional rewards, rewards that are only distributed if certain conditions are met. Of course, we still pay people for their work. What we're looking at is how and whether we should dangle additional carrots in front of them.)

The first approach is Winner Take All, common in business, where one or a few top performers get a reward, and the others get nothing. This is the Employee of the Month mentality, the inspiration for the vacation trips for Top Performers, the Bonus Programs for those at the top of the heap. Competition and desire for reward will supposedly motivate everyone to work harder and strive for the top spot.

The second method, even more common in business, is Proportional Distribution, where each person gets rewarded in proportion to their ranking, so the higher performers get more than the lower performers. This is the familiar Pay-for-Performance mentality, the Commission Sales approach, the Ranking of people, the Piece Work approach, the Performance Appraisal approach. The theory is that people will work harder and strive to do more and better quality work under these systems in order to earn more.

Third, is the Equal Distribution approach, rare in business, where groups are rewarded equally, or not at all. Elements of this are sometimes seen in Profit Sharing plans, or Team Reward, but this approach is most often dismissed without consideration. Ideas like this are labelled pie-in-the-sky, impractical, or as leftist / communist / socialist mumbo jumbo.

So, most managers are surprised to discover what research shows to be more effective. And I mean "more effective" from a hard-nosed, results-based, profit-oriented point of view. It turns out that Equal Distribution (all the same conditional rewards or no conditional rewards) outperforms both Pay-for-Performance AND Winner Take All systems, for most human activities. Pay is why people take jobs, but Pay is NOT an effective motivator when it comes to the details of the daily work. It turns out that if you want to get exceptional performance from people in their daily work, you are better served by disconnecting their pay from their actual performance, by decoupling the tasks from the rewards.

Alfie Kohn, author of Punished by Rewards, suggests a revised basic principle for compensation: "Pay people generously and equitably. Do your best to make sure they don't feel exploited. Then do everything in your power to help them put money out of their minds. The problem with financial incentives is not that people are offered too much money; earning a hefty salary is not incompatible with doing good work. Rather, the problem is that money is made too [prominent]. It is pushed into people's faces."

So, instead of contiually whipping our employees into a frenzy about pay issues, about rewards and bonuses and incentives, let's establish a fair pay structure and then set it aside. Let's allow our people to focus on their work, on their customers, on mastering tasks and processes, on pride of workmanship, on nurturing teamwork and relationships, on job satisfaction. Let's support them in improving the work, and stop with the dangling carrots.

It may seem crazy, but consider disconnecting pay from performance. It's a relatively simple systemic shift that can produce deep and far-reaching improvements in your organization.