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Monday, July 11, 2011

On rewarding and performance systems...

The ideas of "pay-for-performance", and it's twin sister "management by objectives" exist to try and increase the performance of a group and ultimately the whole company. The basic idea is: promise them a carrot and they'll work more / better. But is that true? Can a company really perform better by promising people they will get more money if they individually perform better?

It is an appealing though. Instead of working with the people, managers are advised to put the right rewards in place and let people loose. Things will magically work out, or so the theory goes.

Although there is some truth to that, the fact is that this simplistic view of reality hides, or ignores, the deeper impacts of the individual performance reward culture:

  • First, by placing rewards at the centre of the performance system, the companies shift the conversation to rewards and away from work
  • Most people feel they perform above average, but reward systems tend to grade people on "the curve". This leads the lower performers to get a higher grade than they deserve (but still lower than they think it should be) and the top performers a lower grade than they deserve because of the need to "follow the curve". This has the notorious effect of leaving everybody unhappy.
  • Most importantly, the reward mechanisms that focus on individual performance completely miss the fact that a company exists in a complex environment. Especially non-trivial work (like software), is impossible to reduce to a set of repetitive steps. The immediate consequence of this is that, even if all the people perform at their best and get the top evaluation, the company could still totally fail to meet the level of their competitors. The performance of the system (the company) depends on the complex interactions between the different people in the company. If all try to optimize their personal performance, the system as a whole can perform a lot worse.

What amazes me is that there are still people who advocate "pay-for-performance" in complex environments like software development.
The fact that we work in a complex environment all but ensures that "pay-for-performance" is at best indifferent to the overall company's performance and at worse an active value detractor for the company.

An additional bonus

Deming and Shewhart proved that in a stable system, trying to change it's performance from the outside can actually reduce the performance of the whole system. Deming called this "tampering": messing about with a system you don't understand (link to Deming and tampering).
"Pay-for-performance" and "management by objectives" are an instance of "tampering". Instead of messing about with a system we don't understand we, as managers, should focus our energy on understanding that system and changing the system through the use of small and controlled experiments.

This is not as easy as it sounds, but is the only way in which managers add value to their companies.

If you still want to have variable salary costs in your company, then use a profit sharing scheme: where everybody shares in on the success and pain, rather than individuals independently. Besides, can you really evaluate a single individual's contribution to the success of the whole company? (Especially when the company is not succeeding and that individual still claims their bonus?)

One question that is raised against the view I tried to explain is: "Fine, but how do I keep top performers? They certainly want to be rewarded by their good work, right?" My answer to this question is that people value many different things. While some people are influenced by short term gains, most people do not act consistently with that hypothesis. There's evidence that people react more consistently with (see this video):

  • "meaning", i.e., they are more motivated and committed when they feel that their work has meaning; or
  • "peer-recognition", i.e., people tend to feel more committed and motivated in an environment where their work is appreciated by their peers.

A better way to keep your best people is to work on creating an environment where people's work is recognized by their peers, and the meaning or nexus of that work is clear to everyone.

You, as a manager, have to focus on those things!

Photo credit: L2F1 @ flickr

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at 16:49 | 7 comments links to this post
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