erit pay is tough. Making it work—truly work— requires three things: the ability
to differentiate people based on their performance, the willingness to reward them
accordingly, and a commitment to balancing the long-term interests of the larger
group with the short-term interests of an individual. That’s a tall order, even
in the best of times.
As with any other pay-for-performance approach, the notion
of merit pay rests, by definition, on a foundation of differentiation. It is based
on having both the ability and the willingness to differentiate employees by their
individual performance.
The ability to differentiate, by genuinely and fairly discerning
performance differences, usually requires the presence of a performance-assessment
process or tool. The majority of organizations of any size have a performance management
program of some sort in place. While most performance programs could undoubtedly
be improved, my experience suggests that the biggest obstacle to true performance
differentiation is not the ability to recognize performance differences, but rather
the willingness to do so.
In some places, there is an organization-wide cultural barrier
that stands in the way of differentiation. These employers choose to embrace the
idea that every employee is outstanding and makes exceptional contributions. I’ve
heard senior leaders make statements to this effect in all-staff meetings. Perhaps
the statements are true, perhaps not, but taking the stance that every employee
is an above-average performer makes differentiation all but impossible.
The only way to depart from the norm in circumstances like
these is to go downward, and that tends not to happen, except in the face of an
extreme performance deficiency. Some of these companies attempt to create differentiation
by establishing a new, even higher performance level—let’s call it "super exceptional."
But guess what? In these organizations it is only a matter of time— one or two performance
cycles at most—before virtually everyone floats up to the new level of excellence.
These organizations must do some real soul searching to determine
whether they truly can or even should pay for performance. Not every employer is
able to go the pay-for-performance route. The key is honesty about where the organization
stands. Don’t tell employees that pay is based on merit if everyone gets the same
salary increase. You aren’t fooling them, and your credibility will be the worse
for it.
More often than not, though, the willingness problem appears
at the level of the individual manager. The organization accepts and promotes the
concept of differentiation, but managers are unwilling to call out differences among
their own reports. This plays itself out in a fashion similar to the classic dilemma
called "the tragedy of the commons."
The theory underlying the tragedy of the commons dates
back as far as Aristotle, but it was popularized in modern times by the
essay of the same name by Garrett Hardin
in Science magazine. Essentially, the essay describes the dilemma that occurs when
the short-term interests of individuals are at odds with the long-term interests
of the group.
Following is a summary of Hardin’s 1968 article (courtesy
of Wikipedia):
This story describes a group of herders having open access
to a common parcel of land on which they could let their cows graze. It is in each
herder’s interest to put as many cows as possible onto the land, even if the commons
is damaged as a result. The herder receives all the benefits from the additional
cows but the damage to the commons is shared by the entire group. Yet if all herders
make this individually rational decision, the commons is destroyed and all will
suffer.
As Hardin and others point out, the tragedy plays itself out
in a wide range of modern-day commons, beginning (but not ending) with our use of
resources such as water, parks and wetlands, fish stocks and oil. I believe we see
a similar dynamic at work among managers when it comes time to assess their subordinates'
performance and hand out merit increases.
The actions of many managers suggest to me that they see their
role and their primary objective in the merit-pay process to be getting the highest
possible increases for each of their reports, however that might be accomplished,
rather than distinguishing the genuine performance differences between their subordinates
and rewarding them accordingly. If gaming the pay system is the most expedient way
to get the highest increase for each report, then so be it.
The outcome of this behavior is that the ability of the organization
to make merit pay work, to differentiate and reward the employees who truly go above
and beyond in their roles, is compromised in favor of the individual manager trying
to maximize the pay levels of his particular group of employees. Merit pay ultimately
fails for lack of willingness to differentiate.
How do we address this workplace version of the tragedy of
the commons? Many organizations respond with training to improve managers’ skills
in setting performance expectations, in coaching employees and in providing constructive
feedback. While this is all good, it is not, to my mind, a remedy for the problem
of the managers’ unwillingness to differentiate. To deal with the root issue, we
must go to the very definition of what it means to be in a management role.
One of the most important aspects of the role of a manager—perhaps
the most important role—is that of stewardship. A good manager means being a good
steward of the organization’s economic and human resources. Stewardship involves
actively balancing the needs of both the employees and the organization. A manager
putting the short-term interests of his employees above the longer-term interests
of the larger group is failing as a steward.
I believe that stewardship is the only way to make merit pay
work. Until we hold managers accountable for their roles as stewards, the willingness
obstacle will remain. Accountability begins with consequences: positive consequences
for doing the right thing and unpleasant consequences for getting it wrong.
A manager who encounters only positive consequences as a result
of putting his immediate interests ahead of those of the organization ("I am a hero
to my team!") is not being held accountable. But what if there really were accountability?
What if that manager's superiors were to challenge and express concern about that
action? What if the manager was called on to defend that action in a forum of peers?
What if the manager’s personal performance was assessed as "needing improvement,"
leading to no raise or a low raise, directly as a result of the shortsighted and
self-serving nature of his actions? These negative consequences would probably cause
the manager to rethink his approach.
Merit pay is tough, particularly in these difficult times.
When things are tough, however, can we afford not to recognize and reward those
performers whose efforts and actions set the example and help drive the organization
toward better times? Stewardship is a high standard for managers, but it is ultimately
the only way to make merit pay work. Until we hold managers accountable for their
roles as stewards, we will be unable to conquer the tragedy of the commons, and
our merit-pay efforts will be doomed to fail.
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