Pay drives performance. Sounds nice, doesn’t it? At the very least, it sounds all-too-familiar. If I only had a penny for every time I’ve heard this – and another one for every time people get it wrong…

Let’s leave aside for a moment the question about the effectiveness of vehicles like bonuses, other incentives or financial recognition to “drive” performance and concentrate on base salary.

Week after week we find ourselves in conversations with clients who, at one point or another, start talking about the need to link salaries to performance. Because if you don’t, then how are you going to keep employees motivated and recognise the contribution of “good” performers over that of “average” performers? (and I’m using sarcastic quotation marks very deliberately here)

Therein lies the problem. This question is fundamentally flawed.

First, it makes a far-fetched assumption that money, and in particular (typically small) changes to salary levels, motivates people. Research on this field and our own experience show that there are many other factors that tend to be above salary on an employee’s motivations’ list.

These include meaning, development, a sense of belonging and autonomy to name a few.

Then, there is the question of differentiating and rewarding superior performance. This calls for a properly designed performance management system, with the right levels of capacity and capability in line managers and HR to operate it effectively, and meaningful enough rewards to have a real motivational impact. MUCH easier said than done.

What ends up happening in many organisations is that overbearing, heavily form-driven, performance management systems are poorly implemented with the process being skewed in order to be able to deliver certain pay outcomes for specific individuals.

In today’s world of work, evaluating performance on the basis of not-always-reliable job descriptions and fixed objectives can actually get in the way of innovation and agility. And, with the exception of the very top performers, differentiating performance between the “good” and the “very good” will always prove a tall order.

As a result, the integrity and credibility of performance management is eroded, frustration grows in employees from seeing unfair salary outcomes and the very purpose of driving improved performance is defeated as employees stop seeing the point of going the extra mile – at least in terms of pay.

And it doesn’t stop there. The damage extends to employee development too. When employees see that their salary is linked to performance they will be less likely to explore areas where they need support as it may impact the assessment of their performance.

This results in development focusing more, if not exclusively, on current strengths. Do you want this in your organisation? To be clear, we don’t suggest that having a link between performance and base salaries does not work.

Our view is that it is very difficult to make it work and, if you get it wrong, the downside of missing out on performance-related pay increases will far outweigh the potential upside of the motivation employees may get from them.

Our advice is to focus on getting base pay right, to keep it from being demotivating, and de-couple it from employee performance. We offer some ideas on how to do it in this article.

Then, if there is a desire to reward performance, we suggest exploring other options to do it. A recent article on incentives from QCG can help you shape your ideas on this front.

Ask yourself, do you want pay to work for employees and your organisation, or do you want to go chasing unicorns? Contact us if you want to learn about how we help clients make reward and the overall employee experience work well.

Juan Novoa, Lead Consultant at QCG – January 2020