Despite the general shift from fixed to variable reward, there is little
evidence that offering enhanced pay for higher performance has led to increased
motivation or real gains in performance.
This should not have been a surprise to us. After all, our understanding about the
limited impact of reward dates back to the 1940s and 50s with research by
Abraham Maslow and Frederick Herzberg but has also been reinforced and extended
by more recent insights emerging from behavioural science, neuroscience and
behavioural economics. These insights
increasingly suggest that there are major difficulties involved in attempting
to link pay to performance.
Firstly, we know that reward is a hygiene factor rather than being a
true motivator, i.e. it has little ability to motivate but if it is
inappropriate or even just perceived as inappropriate it can be a powerful
demotivator. People may also end up
feeling punished if they do not receive the full potential or expected
payout.
In addition, although performance based pay may work for employees
working on a production line it has a particularly low impact on Peter Drucker’s knowledge workers. The over justification effect, identified by Edward Deci, suggests that the only thing extrinsic reward
does do for these people is to reduce the intrinsic motivation that they
started out with. For example many
investment bankers are less interested in high pay than the symbolic value of
this payment and the way pay helps them compare their performance to their
colleagues. (You can see this very
clearly if you happen to be in an investment bank when the annual bonuses are
announced.) By encouraging bankers to
see reward as a proxy for their value we have encouraged them to become
extrinsically motivated and have also got locked into a very expensive system
for communicating their comparative worth.
Incentives will also not work, even for production line workers, if
they are seen as too small and
unimportant. They will also have limited
impact on those who are not materialistic and have their own value system or are
just more focused on fairness and equity than they are on maximizing their own
wealth.
Any impact of variable reward is also likely to be short-term so an organization may find someone
will be more engaged for a short period after receiving a reward but they will
very quickly return to the former level of rather lower engagement. And the reward the person has received very
quickly becomes an entitlement and therefore an even higher reward is required
next time to produce the same increase in engagement.
Rewards can also encourage short-termism and reduce risk taking which
can lead to a culture of compliance rather than improvement. I have even heard it suggested that it is
because reward practitioners tend to get better paid than their other talent
management colleagues that we see less innovation within the reward space!
But inappropriate reward can also encourage excessive risk taking as we saw
with the activities of investment bankers which triggered the recent global
recession.
I also had an interesting experience working with one of the big global
banks shortly after 2008 financial crash.
This firm’s
CHRO put the world’s
troubles down in no small part to the HR Business Partners who supported the
firm’s investment
bank. She explained that when it came to
the annual salary review she got no trouble at all from most HR practitioners
but the HRBPs in the investment banking group would be up in arms. Basically they had gone native and taken on
the characteristics and behaviours of their client group. This, together with their own comparatively
high rewards within the HR function and profession, had stopped them seeing the
dangerous consequences of the ways that the investment bankers were being paid.
Various studies have also shown that high pay, or the potential for high
pay, reduces productivity and performance and that at a certain level of reward
organizations no longer have to pay more to get higher performance.
Individually focused reward can also sabotage work relationships, hindering team working and
collaboration. This is important as a
high proportion of work undertaken by knowledge workers (generally over half),
as well as other employees, tends to be collaborative rather than individual in nature, that is
performance results from the collective action of teams, networks and
communities not just of the individual employees themselves.
A final issue is that trust in organizational management is
declining. For example, one of the leading global
surveys on trust, the Edelman
Trust Barometer, has found
significant falls in trust in the last decade or so, and notes some of the
greatest falls are for hierarchically based relationships and with positions of
authority such as a CEO.
Linked to this, there are also concerns about the way reward programmes
are implemented and whether they are applied fairly. For example, equal pay audits have often
highlighted unintended but unequal pay practices that lie behind ongoing gender
pay gaps.
Lack of trust in management, and in the reward programmes executed by
this management, also reduce the positive impact these sorts of schemes will
have as employees apply a psychological discount in the way that they value
them, focusing on what they believe they are likely to realize, rather than the
full realisable pay.
Given all of this, how much value do we really derive from our
performance based pay schemes?
- Consulting Research Speaking Training Writing
- Strategy - Talent - Engagement - Change and OD
- Contact me to create more value for your business
- jon [dot] ingham [at] strategic [dash] hcm [dot] com
