SAG

Friday 15 February 2013

Performance and Pay: Money Doesn't Buy Happiness (Or Results)


Recently I was having a conversation about the issues associated with putting in place a performance management process that is meaningful for both the company and employees.  During the discussion the issue of how to allocate bonuses based on the results of the performance review reared it’s ugly head. That led to a discussion on ‘forced’ distribution. The culture of the firm I was speaking with has always rewarded the top performers through the output of the performance reviews. I suggested that this sacred cow needed to be examined more closely.

Many organizations struggle with this concept: Do you link bonus and pay to the performance review or do you disjoin the two?


Despite whatever beliefs we might have about how human beings function, the reality is that pay does not motivate performance. According to the 2005 Annual Review of Psychology, "There is surprisingly little evidence about the performance implications of adopting, or not adopting merit pay programs." A November 2009 McKinsey & Co. report found that "...three noncash motivators, including visibility with top management, are more effective motivators than the three highest-rated financial incentives, including increased base pay and cash bonuses."

Indeed, research from both academics and global consulting firms find again and again that organizational, career and job-related factors for improving employee engagement and motivational levels out rank pay and bonus as motivators. Then why are we stuck on the idea that bonus, especially linked to the overall performance review, will in fact lead to increases in commitment to the company, the job or improvements to performance?

Dan Pink examined the common management notion that financial incentives drive employee performance. According to his summation of four decades of research for many jobs in the 21st century, employers will not elicit peak performance through monetary rewards, but by creating jobs with autonomy, mastery and purpose. Pink still associates pay for performance with jobs that are routine and clearly defined by objective production measures. But he notes that those in more complex cognitive roles will not be motivated to high levels of sustained performance through pay. Financial rewards can actually lead to impaired performance even for jobs that require a modicum of cognitive thinking.

Further a Towers Watson study found that conventional pay systems designed to engage employees do not effectively work. While designed to motivate employees to higher levels of quality, they only produce more quantity at best. In fact the study in 2008 indicates that pay is not even among the top 10 drivers of employee engagement. Engagement being defined as ‘an employee’s ability and willingness to contribute to company success’.

Yet, when I do work with companies, I sense a widespread belief among HR professionals that there is a direct link between pay and performance. When I began working in Southeast Asia, for example, most HR professionals insisted that employees at all levels would change jobs for even miniscule differences in salary. Hence, it was vital to be intensely competitive on pay. In fact, surveys and academic research show that the tipping point for changing jobs seems to occur when the pay differential reaches 20% - a sizable amount of wiggle room.

Nevertheless, that belief underpins the common rationale for ensuring the results of the performance reviews are the foundation for pay decisions. This is even more problematic when you consider that the overall objectivity and honesty of many performance reviews are often in question! 

And it’s further complicated by the concept of ‘forced ranking’.  In a forced ranking system, employees are categorized based on performance reviews.  However, a forced ranking system is based on the expected numbers, not on reality.  People are not categorized on their actual performance, but relative to one another.  This fails to take into account the fluctuation of both individual, departmental and organizational performance.  From the perspective of an employee, being assessed based on things out of your control is a de-motivator, which is the opposite of the goals of performance management.  The net result is that by applying the pressure of forced ranking on employees the organization runs the risk of losing good people.

Often forced rankings become political or "gamed" and not based on objective performance standards.  It is not unusual for a manager to place a person in the highest performing category along the bell curve because they achieved desired business results even though their work and interpersonal behaviors make them undesirable employees. It is also common for managers to ‘punish’ long-term workers who are vested in the firm with lower rankings and lower payouts in order to advance a younger person in order to ‘save’ them and retain them, despite job performance that may not be as good. Indeed, the forced ranking system generally has a negative impact on performance, not positive.  A system that leads to gaming needs to be rethought.  

Performance reviews and performance management are best considered as part of a relationship based method rather than a transactional process. But that's a blog for another time. For now I am left pondering my original question: If pay and bonuses are not the drivers for improved quality of work, greater contribution, and longer commitment why are so many firms still linking money to performance reviews?

9 comments:

  1. Sometimes, something is missing in a process that results in the process not working as intended.
    Trying to tie performance appraisals(a well documented broken process to a bonus) exacerbates the problem! I designed an intervening process "Pay Appraisal" in the gap between performance and pay. The intervening process takes in performance as a factor, external equity, internal equity, the organization's ability to pay, high/low potential, and any number of other organizational considerations and via a mathematical formula creates a complete process that is empirically sound and legally defensible! Don Ledbetter Professor University Incarnate Word

    ReplyDelete
    Replies
    1. Don Thank you for contributing the this discussion. I fully agree that there is great fiction written in many a performance appraisal. The system, for the most part, is broken. I also agree that if managers took their time to conduct an ongoing behavioural discussion with employees they would find more objective and fact based evidence to how the person was executing their job. I fully agree with your approach and we have developed such systems for a few of our clients. The results took those who were always 'exceeding expectations' to meeting and even some who were not 'meeting' to meeting because the manager had discovered things they did not know were happening. Getting the formula right so managers can't game the system is the key to making this work.

      Delete
  2. Many variables of one's need has direct corelation between the two. The variables are wide spread and geo-social structure driven. As well, definition of conventional (still)HR and leadership, employee performance has lot to do with it. I would rather put crisis management as another driver between the two. Crisis from both sides- Organization & Employee.
    This is a debate that will never end - balancing and geo-human economics at all level are prize areas.

    ReplyDelete
  3. Too many firms do not understand the value of leadership. They default to pay and bonus as "carrots" to motivate employees because they lack the leadership skills to properly motivate their team. All leadership is situational and the leader must understand the motivational drivers to properly create the "carrots". There may even be situations where pay and bonus are motivators (however rare). Why not ask team members to allocate bonus money to the rest of the team based on how well the teammate contributed (in the eyes of the remaining teammates) to the team success.

    ReplyDelete
    Replies
    1. Robin I would suggest that when people see that their work is linked to something greater then one's self and that they make a contribution to something they have passion for they are motivated and engaged. Leaders often lack the capability or willingness to provide a clear and meaningful vision that pulls their employees forward. If they did compensation would not be the issue. As for team based bonus distribution that is an interesting idea, if anyone has experience with this please add to the conversation.

      Delete
  4. Well-written overview David. I think many organizations deceive themselves. By sticking with "it's only about money", they create compensation rules and policies that management can hide behind, rather than actually leading and involving people. They have an excuse for why people leave -- "it's our payscale, and not the fact that we treat people like robots and idiots."

    ReplyDelete
    Replies
    1. Chris thank you for your comment. Yes, I would agree that by putting in compensation rules they hide behind having to have meaningful dialogue with an employee. However, as a result the compensation people have to continuously modify their scales and policies in order to continuously hold people's attention. Why don't they figure out what the job is actually worth and hold managers accountable for holding direct reports responsible for meeting targets while demonstrating the norms / values of the organization and the behaviours associated with the role? That would result in transparency and honesty and make performance reviews more meaningful.

      Delete
  5. I do not believe "all leadership is situational" nor are "carrots" always needed. In addition, there are some organizations in existence in which it is not "all about the money." I agree money does not buy happiness or results. So, how would leaders go about getting results/happiness from the following two types of employees: an employee with ability and willingness and an employee with willingness lacking ability? Just posing a question, I believe is often missed.

    ReplyDelete
    Replies
    1. I agree that money is not the real motivator for sustained application of discretionary effort. Happiness comes when one feels that what they are doing makes a different and makes a contribution beyond one's self. A suggestion would be for the employee with the ability and willingness would be to ensure they are aligned to the values and see passion in the vision so they don't believe but rather know they are making a meaningful contribution. Without that tie to the vision and meaningful contribution it will mostly remain just a job. For the Employee with the willingness and who has the tie to the vision but lacks the ability it would be either placing them in the organization where their abilities match the needs of the job or providing them with honest and meaningful feedback to get them to grow their capability if that capability were linked to behaviour. It the lack of capability is a skill and knowledge issue the fix is easier.

      Delete

Note: only a member of this blog may post a comment.