performance related pay - is it fair, transparent, behaviour-changing?

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Performance Related Pay

Don’t Shoot the Messenger


Some context

Bonuses and Performance Related Pay are widespread in corporate Britain and rarer in the public and not-for-profit sector.

Studies trying to show the difference that PRP makes to performance are hard to produce for the private sector as there are no ‘control’ experiments. In the public sector, there is potential for some ‘control’ - research has shown a mixed impact.

A few US companies are abandoning performance rankings, and making discussions about pay for performance more flexible for managers locally.

Surveys and feedback from across all types of workers show that lack of pay differentiation DE-MOTIVATES the best performers.


The Performance Management Wheel


How is Performance Management related to Reward?

Some people think:

•PRP distorts the PM process

•It isn’t possible to fairly assess performance

•PM is only about developing the individual

Most resistance arises from•Cultural lack of accountability

•Weakness in management at one or more levels

•Deep misunderstanding about what PM is for


Challenges of effective PRP

• Complex systems for setting PRP encourage ‘gaming’

• PRP can ‘skew’ behaviour and activity to focus purely on achieving the reward

• Very low payouts presented as ‘motivational’ may be perceived as ‘insulting’

• An ‘unattainable’ pay out is demotivating (bar set too high or for too few)


Think about the variable aspects of pay and reward at your organisation

What is working well?

What is causing you most problems?


Dilemmas of PRP

Money is NOT a motivator.

Money is one measure of:

•Success•Recognition•Achievement•Value to the organisation•Skill scarcity•Employee power

In most ‘knowledge’ roles, there can be a substantial difference in performance between people doing the ‘same’ job.

In knowledge-based workplaces, behaviour is one of the most important drivers of organisational performance.


Money can and does drive behaviour

• Pick-pockets • Bank Robbing• Bank-bonuses (e.g. 50%

and more of salary)• Commission only sales• Piece work• Any paid work – given a

private income most people would not do their current job

Individual attitudes to money depend on:

•Personal circumstances

•Expectations

•Family upbringing and past experiences


If your organisation uses money to drive behaviour…

How clear are management about what behaviour is wanted?

How well do the processes deliver the result?


Money can focus attention on what really matters – the strategy

Encourage innovationResearch ledTake risks

Customer focusedComplete packageService culture

Think ‘lean’Reduce wasteFocus on cost drivers

Weak decision makingConflicting prioritiesPet projects

Adapted from ‘The Discipline of Market Leaders’ by Wiersema + Treacy, 1995Ref: ‘Are Leaders Portable?’, Groysberg et al , HBR 2006


If your organisation uses money to focus attention on strategy…

How clear are the signals?

How well do the processes deliver the results?


How much money is ‘meaningful’?

• Annual pay rises are running below inflation

• A recent survey by CEB reported that more than half the UK workforce CLAIM they would change jobs for 10% pay increase.

• Typical pay rise for VOLUNTARY job change is 10 - 20% in UK (CIPD )

• Worldatwork research – average promotion bonus:

• In practice, in professional jobs, more money is factor 4 or 5 in changing employer


So – WHY introduce PRP?

• In most knowledge-based organisations it is clear to many people who ‘gets things done’

• Nothing is more demotivating to the best performers than seeing the ‘lazy’ receive the same reward

• An effective process of PRP drives clarity of purpose for the organisation

• Effective application of PRP makes clear that the organisation values high performers


Principles to consider

• What is the organisation aiming to reward with PRP?

• What is the scale of the additional reward?

• What proportion of people might expect to achieve additional reward?

• Who will make which decisions about additional reward?

• What checks and balances will there be?


HOW will PRP decisions be made in future?

Data Driven requires..• Objectives linked to

meaningful data – ‘Lowest Cost’ data– ‘Customer Satisfaction’ data– ‘Innovation data’

• Performance assessed by impact rather than activity– E.g. Cost per effective hire

rather than cost per hire

Personal Judgement requires..• Clarity about what is

important to the organisation and the situation

• Reconcile management expertise with analysis

‘Bogus rationality seeks to objectify expertise by fitting it into a template’ FT Sept 2nd 2014

No FAKE MATHS !


Selected references

Key texts supporting this presentation include:

Barrick & Mount, The Big Five Personality Dimensions and Job Performance: a meta analysis, Personnel Psychology 1991 number 44Hurtz & Donovan, Personality & Job Performance: The Big Five revisited, Journal of Applied Psychology, Vol 85 No 6 P.869-879 2000 ftp://ftp.cba.uri.edu/Classes/swann/Hurtz%20&%20Donovan.pdf Date Accessed: 29/10/11Erik Brynjolfsson and Shinkyu Yang, Information Technology and Productivity: A review of the Literature, Advances in Computers, Academic Press, Vol. 43, P. 179-214, 1996, http://ccs.mit.edu/papers/CCSWP202/ Date accessed: 31/08/11Franco, M., Bourne, M., and Neely,A. Understanding strategic performance measurement systems and their impact on organizational output: a systematic review. (Working paper 2004)W Cobussen, The relationship between job insecurity and work performance: A study among blue collar workers in the south of the Netherlands, Technische Universiteit Eindhoven, January 2011, http://alexandria.tue.nl/extra2/afstversl/tm/Cobussen%202011.pdf Date accessed: 23/06/2011Dr Veronica Martinez and Dr Mike Kennerley, Impact of Performance Management Reviews: evidence from an energy supplier. Conference proceedings EUROMA, Operations and Global Competitiveness; Budapest, Hungary; June 2005.Yara Peters, p42, A practice oriented research to improve leadership within a mechanistic organisation, University of Twente, Enschede, October 2010, http://essay.utwente.nl/60166/1/MA_thesis_Y_Peters.pdf, Date accessed 28/06/2011Dan Pink, Drive- the surprising truth about what motivates us, Cannongate Books, 2010 (summarises much research from Maslow, Herzberg etc)Herzberg, Frederick. (2003). “One More Time: How Do You Motivate Employees?” Harvard Business Review

performance related pay - is it fair, transparent, behaviour-changing?

Leadership & Management