Does performance-related pay work? Dr Jonathan Trevor explores the issues.
Pay for performance matters. It’s a practice that crosses sectors, affects millions of employees globally and regularly makes the headlines. But there’s a problem, says Dr Jonathan Trevor, Lecturer in Human Resources & Organisations and Co-Director of the Centre for International Human Resource Management (CIHRM). It might not work.
“Companies don’t like to talk about this,” he says. “But we need a debate on this issue, because pay for performance is widespread, and has become the dominant logic of employee reward – the notion that we can use pay as a carrot, or a stick, and drive positive employee behaviour. In reality, I believe pay is like plumbing. You only ever notice it when it goes wrong. It can be used in good or bad ways – but often it is the latter. It is often misused, or used inappropriately, as a crutch for poor leadership – especially in the financial sector.”
For five years, Dr Trevor acted as a retained academic advisor to The Remuneration Group, a consortium of senior remuneration directors working in FTSE 50 companies who met each year for a two-day round table and research exposition in Cambridge. As director of ConsultCambridge Ltd, he brings together the academic and business world to find new ways of applying theory to practice.
It’s very much a two-way street,” he says. “We meet with extremely senior people from the UK’s most successful companies who work side-by-side with researchers to identify a research agenda. They, in turn, feed back from their own research and help the business leaders to understand what it means in their own context, and what they might do differently in terms of driving performance and, crucially, managing risk.
The theory behind pay for performance is logical: it helps to establish a line of sight between the individual and their contribution to the organisation’s goals and purposes.
But when it goes bad, the consequences can be highly destructive. Dr Trevor points to the ongoing payment protection insurance (PPI) mis-selling scandal that has thus far cost banks £22.2 billion in compensation. Employees were given a financial incentive for each policy they sold. They were, indeed, highly motivated to sell more. But, says Dr Trevor, it didn’t work.
The incentives in question drove a certain type of behaviour – aggressive sales at any cost. But that behaviour was not functional. It caused both reputational and financial harm and was ultimately counterproductive.
In the mis-selling scandal, the pay structures were relatively simple. But the other main problem with pay for performance, says Dr Trevor, is its complexity, a central theme of his book Can Pay Be Strategic? A Critical Exploration of Strategic Pay in Practice. The way we work is changing, and pay for performance is struggling to keep pace. Companies necessarily need to rely more and more upon the discretion of their people, as opposed to requiring them to simply follow, or perform against highly prescribed targets. In that context, pay for performance becomes vastly complicated and therefore less effective as a means of management control.
“Selling Mars bars is one thing,” says Dr Trevor. “Creating a market-changing innovation or technology is quite another. How do you incentivise someone in a research and development department when it might take 10 years for their work to bear any commercial benefit and when the actual innovation process is quite serendipitous?”
How indeed? Why might people work hard, if not for extra pay? Dr Trevor points out that, surprisingly, research shows that money consistently comes very low down the list of potential motivational factors. Although it’s often mentioned in exit interviews as the reason why someone leaves, more in-depth research shows that people don’t leave companies because of the money. (In fact, he says, they don’t leave companies at all. They leave managers.)
He cites three main motivators: “First: a common purpose. Does the company do meaningful work – and does the individual understand his or her role within it? Second: engaging work. Jobs can be constructed in such a way as to make them naturally engaging, challenging and have clear impact. And third: good management.
“The by-product of these is that not only a more capable workforce, but actually they are naturally engaging processes. They can be more powerful than just simply an annual performance review and pay bump. And ultimately, the absence of those things cannot be made good by either paying people more, or paying people more aggressively.”
It’s still hard for companies to admit that new thinking is needed. But the numbers say that the conversation is changing. “If you look at trend statistics, many companies are actually moving away from pay for performance,” says Dr Trevor. “They are disconnecting performance management and pay – and realising that pay as a consequence to either good or poor performance is actually just disconnecting people from what performance management should be – an honest and forward looking conversation that connects the individual with the purpose of their employer.”