Can There Be Too Much Pay For Performance?

A post about the War on Talent on Bob Sutton's HBR blog, also mentioned today on David Maister's blog, highlights five lessons which are important for winning the war.

Being who I am and doing what I do, Lesson #3 jumped out at me:

3.  Create smaller rather than larger pay differences between "star" employees and everyone else.

Bob goes on to explain what led him to this particular lesson:

Jack Welch doesn't believe this; he wants you to give 80 percent of the bonus money to the top 20 percent of your people.  And there are a lot of other experts out there who want you to throw most of your salary and bonus dollars to your stars.  But Jeff Pfeffer and I have reviewed this literature very carefully and every article that we can find in a peer-reviewed journal - of top management teams, baseball teams, academic departments, manufacturing organizations - finds (controlling for level of pay) that performance is better when there is smaller distance between the best-paid and worst-paid people.  This isn't an argument for socialism - there are still big differences between the best- and worst-paid people in even the baseball and top management teams with the most compressed pay.  But it does suggest that the widening pay gaps between the "best" and "worst" may run contrary to the best evidence.

Now I'm no huge fan of Jack Welch style pay approaches, and I am often the one grabbing for the brakes as my clients rush headlong toward various "pay for performance" initiatives, but I was a bit taken aback by this advice (which some of the recent rewards research I've run into would seem to contradict).  Admittedly, I am also looking at this from the perspective of broad based pay practices, versus just those aimed at top management teams - because I believe that is the context in which some of these lessons will be read. 

A few thoughts in response:

• To me, there is a big leap in tying together the existing differences between the highest and lowest paid people (which may or may not be the result of peformance differences) and attempts to differentiate pay based on performance.  I'd hate to taint our efforts to do the latter with the issues created by the former.
• To me, there is also a difference between throwing the lion's share of discretionary pay dollars at a few "stars" and creating meaningful distinctions in pay to recognize and reward performance results.  The former approach can, undeniably, create cultural and morale issues (certainly a less than ideal battleground for the war on talent) among the "Steady Eddies" (as one of my clients affectionately calls them) who turn in solid work day in and day out, but aren't considered among an elite group of "stars".  The latter is an end worth striving for, as difficult as we find it to pull off.
• And while we're at it, I think it matters a lot how an organization defines "stars" and star performance.  Are these high-flying, high-ego "rock stars"?  Natural collaborators who put group success ahead of their own personal advancement?  The outcome of pay differentiation will depend on what you've chosen to annoint as star qualities and how you define them.  The whole "pay for performance" paradigm rests on the foundational assumption that you have first done a good (and smart) job of identifying what great performance really is.
• Reading between the lines of Bob's rationale for this rule (if I may be so bold), I sense that there is also a tension around rewarding individual versus team or group performance.  That too much pay distinction between individuals will undermine the spirit of teamwork and cooperation that so many organizations see as critical to their success.  I agree that this tension deserves our attention.  In more organizations, there must be a balance between group and individual rewards.  Exactly where that balance is struck depends on the organization, where they're headed and how they hope to get there.

I hope to learn more about the sources that Bob and his colleague Jeff Pfeffer considered in coming to their conclusion about reducing pay differentiation based on performance, and which are featured in their book Hard Facts, Dangerous Truths and Total Nonsense.  Probably there are important lessons that those in the compensation (and overall human resources) field need to understand.  But while I have certainly seen "pay for performance" initiatives misfire and backfire as much as the next consultant, I still believe that the concept has merit and is worth pursuing. 

I guess that's why I'm still doing what I do.

Comments

[Niblet]

As one of the aforementioned "Steady Eddies", I can tell you that I understand the business motivation for an enterprise to pay for performance, but those of us in the support categories really would like some recognition too, rather than the standard 3-4% raise. The gap between the "High-Potentials" and "super performers" grows every day.

Not every employee desires to be in management or on the fast track, but that should not relegate a committed steady performer to the dustbin without recognition. There must be some way to recognize those essential cogs in the wheel of any organization.

I love what I do & the people I work with. I just wish that I did not feel like I was recognized as much as the furniture - that is to say "not at all". I may not earn millions, or even thousands, for the company, but I keep things running just like many of my fellow Steady Eddies. After all, someone's got to "keep the light on for you".

[Ann Bares]

Niblet:

To my mind, recognizing and rewarding high performers in support positions should be a priority just like in management or any other type of roles. A great performer can make a big difference in the success of the organization, no matter what role they are in. An organization where only people at the top of the ladder are recognized and rewarded doesn't seem like a place I would want to work.

Thanks for your comment and for making your point - it is an important one.