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Pay For Performance

by Miki Saxon

In a post last week I asked for opinions on the ideas presented in a series of articles in Business Week on managing smarter but especially one that claims that “treating top performers the same as weaker ones is ‘strategic suicide'” and said I would add my thoughts in a future post.

Bob Foster left two interesting comments (well worth your time to click over and read). Regarding pay for performance he tells the story of a company where everybody from the CEO down all quit.

“Taking on the task to salvage the company, I hired new people that met unusual qualifications: they had to be qualified for the job they were applying for; they had to be unemployed and available immediately; they had to work at sub-standard wages; they had to work while knowing the company could close at any minute; and they had to work without supervision. The team that came together produced a highly successful company, and it was not because of high pay, or performance bonuses (there were none). The team stayed together, and performed, because of mutual respect, trust, appreciation, and consideration—people were ‘valued.’ To me, this is the truest form of ‘pay for performance.'”

I agree that trust was one of the key ingredients in what Bob accomplished, but it wasn’t the only one—or maybe I should say that it needs to be based on fairness and honesty.

Bob says the pay was ‘sub-standard’, but I assume that it was universally sub-standard relative to position and experience. If he had chosen to pay part of the team, say 10% more than their peers, the team wouldn’t have coalesced.

And that is exactly why I disagree with the idea of paying top performers, AKA stars, big sign-on bonuses or higher salaries than their peers.

  • Based on my own experience, 98% of star performers become stars as a function of their management and the ecosystem in which they perform. Change the management, culture or any other parts that comprise that ecosystem and the star may not survive.
  • Just as a chain is as strong as its weakest link there is no star in any sport, business, media, etc., who can win with a team that is subject to constant turnover and low morale.

Consider this common example.

Two people are hired at the same time with the same background, same GP0 and similar work experience, but with the one exception. One graduated from a ‘name’ school and the other from a community college. Starting salary is $50K, but the manager adds a 20% premium to the first candidate’s offer on the basis that she must be better to have gone to that school.

Neither candidate lived up to their potential because the manager made poor choices. In doing so he set both up to fail but for different reasons; one thought she had it made and the other that he was low value.

Merit bonuses fairly given for effort above and beyond acceptable performance levels make sense as long as they don’t come at the cost of developing new talent.

But one problem with ‘pay for performance’ is the pay often comes before the performance, but there are others and I’ll discuss them more Thursday. In the meantime, here are links to five posts from 2006 that give more detail on the trouble with stars.

Stars—they’re in your MAP

More about stars and MAP

Rejects or stars?

Star compensation

Retaining Stars

Image credit: sxc.hu

6 Responses to “Pay For Performance”
  1. DenisNo Gravatar Says:

    Stars are paid in advance because bonuses are not an efficient motivational tool. At most they are an acquisition and retaining tool if you are close to being the highest bidder.

    I recently had a discussion with a friend and we were wondering how to compensate a software development team for delivering business value. The argument went more to the side of “have the business show appreciation” because bonuses in whatever form (including collective) did not really seem to work as motivational tools.

  2. Miki SaxonNo Gravatar Says:

    So how did the business show its appreciation?

  3. DenisNo Gravatar Says:

    One thing that worked vry well once was to have the business organize a party to celebrate a major milestone

    We were thinking also things like prepare a meal for the IT team, small gifts from the business (would have to be somewhat personal, not a gift card)…

    Speculations for the most part on what we would find actually motivating. Although we would still expect a high pay ;)

  4. Miki SaxonNo Gravatar Says:

    Denis, I while agree with everything you say, including that there are better ways to show appreciation than just money, I think we are talking apples and oranges.

    Nothing you have said has changed my mind about stars or assuming someone will be brilliant in the future because she was in the past. Your example is for a team that accomplished something, not for one being hired.

    Tell me how you would feel if your company hired someone with similar experience and education, but paid him 25, 30, 40 percent more based on hearsay and his negotiation skills.

  5. DenisNo Gravatar Says:

    It happens to me all the time and honestly I don’t care that much. It maybe unfair but them getting less would not give me more…

    What I wanted to point out is that paying “stars” in advance is the same failed idea as paying high bonuses thinking they motivate people or that you get the best and brightest by shelling out more money. The only thing you are sure to get is the greediest you can afford.

    In other words you can buy a star. Making it shine is much more difficult.

  6. Miki SaxonNo Gravatar Says:

    Then my apologies, we are in total agreement. I’ve always said that people who join for money leave for more money.

    I love your “The only thing you are sure to get is the greediest you can afford.In other words you can buy a star. Making it shine is much more difficult.”

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