5 Reasons Why Pay-For-Performance Can Never Work

February 19, 2013 by Stacey Barr

Is the core assumption of pay-for-performance, that we can isolate the contribution of individuals on outcomes, correct? Here are five challenges that need to be met, and met well, before pay-based reward and punishment should even be considered.

Is the core assumption of pay-for-performance, that we can isolate the contribution of individuals on outcomes, correct? Linda Gorman, in her essay on What’s Wrong with Pay for Performance? in the medical and education sectors, writes a compellingly and soundly evidenced argument that should have pay-for-performance advocates dropping it like a hot coal.

From Linda’s essay, I summarised five specific challenges that can’t be ignored in any pay-for-performance scheme – no matter the sector or industry.

Challenge #1: Isolating individual contribution when variation is always going to be present.

Because all things vary, our performance measures will exhibit variation. That’s normal. But if we don’t appreciate that variation, we’ll risk making decisions about a good project manager at a time when the project performance measures are at a natural sway away from target. Likewise, we’ll risk making decisions about a poor project manager at a time when the project performance measures are at a natural sway toward targeted performance.

Challenge #2: Isolating individual contribution when the effect unfolds over time.

Not all impact is immediate. A careers counsellor may instil some great advice in unemployed graduates that won’t take effect until many years after the counsellor has lost contact with those graduates.

Challenge #3: Isolating individual contribution when the system of cause-effect is complex.

More often than we realise, what we assume is people’s impact on an outcome is actually the impact of the processes or systems that people have to work in. Policies, procedures, available resources, management direction, actions of other stakeholders, social forces,… these are just some of the things that can have the biggest contribution to an outcome, irrespective of who the people are that are doing the work.

Challenge #4: Isolating individual contribution without testing the size of and sensitivity of impact.

We “performance manage” people to improve their performance. We give them training, we coach them, we incentivise them. But because of challenge #3, when other factors have dominent effects on an outcome, all this effort to improve people’s performance can have but a tiny and inconsequential (or no discernable) effect on the outcome.

Challenge #5: Isolating individual contribution when the effect comes from interactions, not individuals.

Systems thinking is the study of the interconnections between and among things. It’s the opposite of reductionism. And at least in my experience, it’s a truer description of how the world works. In reducing an outcome to a linear sum of individual people’s contributions, we ignore the fact that much of reason for that outcome being achieved is due to the way those people worked together to make the outcome possible.

This fifth challenge, for me, is probably the most difficult of all to overcome before pay-for-performance can become anything more than a nail in the coffin of true organisational performance excellence.

TAKE ACTION:

I’d love to make this a discussion. What are your thoughts about pay-for-performance, about these challenges, other challenges, and how they might be met? Share your comments on this blog, below.

Facebooktwittergoogle_pluslinkedinmailby feather

Speak Your Mind

Your email address will not be published. Required fields are marked *

  1. Dan Walter says:

    I will be writing a more comprehensive article about this, but wanted to help get the discussion moving.

    First, performance measures will never be perfect or absolute. One thing we do know is that until we start defining metrics and setting goals, we will not know what works or doesn’t work (other than to know what ever the heck we are currently doing is not impressing many).

    Performance measures are not absolute. They need to vary and flex just like the environment, participants and world in general. Too often people make a big effort to get it “right” then stick with “right” even when there is no evidence that it is working.

    Rewarding for performance now that may not impact results until far into the future is hard, but can be largely solved with more and better data. Just like weather services can make a fairly good prediction of the future size and direction of a typhoon or hurricane, we should be able to make similar predictions if we have enough data. To get data, we need to need data. To need better data we have to have a real monetary reason to invest in data (like insurance companies do when looking at storm data.)

    Cause and effect is almost always complex, but we can still point out the better from the worse. It would seem that athletes and dancers should be able to reproduce their efforts every performance, given their rigorous practice. But, they cannot. Perfection cannot be a goal. Better must be the goal. We can predict and measure better.

    Very seldom is a positive contribution truly non discernable. Imagine a bicyclist in a peloton simply doing their job. As one small piece of the big group they help everyone go faster. If they chose to lag, or turn left when everyone else worked in unison it would be obvious to see the poor performer. If you asked the other riders it would be obvious who was better and who was worse. You can measure what the individual must do, by measuring the impact of many many individuals. If this is impossible you probably have a problem with metrics, not goals.

    Interactions, see above and plan accordingly.

  2. John Matthew says:

    The continuing emphasis on pay-for-performance never ceases to amaze me; it pre-supposes that pay is the primary motivator for performance when there are coutless stidies over many years to show that this is not the case.
    When I first read Dan Pink’s “Drive; The Surprising Tructh About What Motivates Us”, two things hit me:
    1 That if an employer during the initial recruitment phase actually agrees to pay the prospective employee more that the person is expecting to be paid, all of a sudden money,as an issue is, from that piont foward, off the table. From that point, it’s about the tasks to be performed for the required outcomes to be produced.
    2 Over years of coaching owners of small business, I believed that systems and procedures were the answer. However, Pink’s assertion that freedom and autonomy are the basis of motivation seemed to be at odds with my thinking. After writing to clarify, he responded: “The key thing to keep in mind is that autonomy and accountability aren’t opposites. Autonomy is the pathway to accountability.” In other words, if people are provided with the freedom and autonomy to contribute to the processes that are to be used in achieving outcomes, they are completely accountable.

    The results being measured therefore, should be those of the organisation and the various sectors that contribute. Peoples’ contributions can be measured by their contribution to the team and a reglar process of communicaion will ensure that any aberration is easily identified.

  3. John Matthew says:

    The continuing emphasis on pay-for-performance never ceases to amaze me; it pre-supposes that pay is the primary motivator for performance when there are coutless studies over many years to show that this is not the case.
    When I first read Dan Pink’s “Drive; The Surprising Tructh About What Motivates Us”, two things hit me:
    1 That if an employer during the initial recruitment phase actually agrees to pay the prospective employee more that the person is expecting to be paid, all of a sudden money,as an issue is, from that piont foward, off the table. From that point, it’s about the tasks to be performed for the required outcomes to be produced.
    2 Over years of coaching owners of small business, I believed that systems and procedures were the answer. However, Pink’s assertion that freedom and autonomy are the basis of motivation seemed to be at odds with my thinking. After writing to clarify, he responded: “The key thing to keep in mind is that autonomy and accountability aren’t opposites. Autonomy is the pathway to accountability.” In other words, if people are provided with the freedom and autonomy to contribute to the processes that are to be used in achieving outcomes, they are completely accountable.

    The results being measured therefore, should be those of the organisation and the various sectors that contribute. Peoples’ contributions can be measured by their contribution to the team and a reglar process of communicaion will ensure that any aberration is easily identified.

  4. John Matthew says:

    The continuing emphasis on pay-for-performance never ceases to amaze me; it pre-supposes that pay is the primary motivator for performance when there are countless studies over many years to show that this is not the case.
    When I first read Dan Pink’s “Drive; The Surprising Truth About What Motivates Us”, two things hit me:
    1 That if an employer during the initial recruitment phase actually agrees to pay the prospective employee more that the person is expecting to be paid, all of a sudden money,as an issue is off the table, from that point foward. From that point, it’s about the tasks to be performed for the required outcomes to be produced.
    2 Over years of coaching owners of small business, I believed that systems and procedures were almost the complete answer. However, Pink’s assertion that freedom and autonomy are the basis of motivation seemed to be at odds with my thinking. How does “freedom and autonomy” fit with pre-determined systems? After writing to clarify, he responded: “The key thing to keep in mind is that autonomy and accountability aren’t opposites. Autonomy is the pathway to accountability.” In other words, if people are provided with the freedom and autonomy to contribute to the processes that are to be used in achieving outcomes, they are completely accountable.

    Not only are they accountable, they’re motivated!

    The results being measured therefore, should be those of the organisation and the various sectors that contribute. Peoples’ contributions can be measured by their contribution to the team and a reglar process of communicaion will ensure that any aberration is easily identified.

  5. Ron says:

    Beware, Stacey. Linda Gorman’s argument is neither compelling nor soundly evidenced. A bit of sound evidence is, instead, reframed here for political effect. The debate hinges more on values than on cause-and-effect. But most disappointing of all may be CMS’s recognition of the overwhelming influence of financial payments as provider incentives.

  6. Steve Andes says:

    Having been in sales for the last 20 years I see very clearly the effect of Challenges 3 & 5. The effect of equal causes in the real world will have very different effects in different companies. Much of that is because of the very different processes encountered in different companies being sold products or services. Some companies have single decision makers to many which might have complex committees making internal decisions. Yet management often expects results assuming no variation in process.

    Additionally, I was judged on bringing in monthly revenue from 7 Sales Executives across three states that had to be within + or – 5%. I developed a multivariable regression analysis that helped me but still the variation was much larger than 5%. I was just lucky sometimes.

    Keep up the great work.

  7. Sound analysis on the risks and pre-requisites for an affective P4P system. Still, it sounds as though if all these risks could be avoided a proper P4P will cause better performance. This is not necessarily the case and there is plenty of evidence that money does not result in optimal motivation. For those interested a good start is the clip http://www.youtube.com/watch?v=Y64ms-htffE (What motivates us)at youtube. Plenty of metastudies e.g. by Prof. Edward Deci (author of “Why we do what we do”). Studies are demonstrating that people are optimally motivated when 3 innate human needs are satisfied: Autonomy, Relatedeness, Competence. See also http://www.youtube.com/watch?v=RPFS70RnSzs and http://www.webex.com/webinars/Motivation-as-a-skill-Strategies-for-managers-and-employees.

  8. It seems that the major consideration is if the person is working autonomously (on her own) or if she has to work as part of a team. I have a problem with the concept of “pay for performance” outside of these difficulties – it’s a value thing. If we are hard workers, wanting to do our best…we don’t need incentive-based pay. Pay for Performance actually would be a detriment to the “hard worker” as it will stymie risk taking (if you misstep your pay would reflect it). It also creates an unhealthy competitive environment. I love competition…but it should be productive, healthy competition. Competition built on mutual respect – back to value-based pay.

    So, to the five reasons, if I were a one-person-shop, I think most of the five would be non-players. Although I LOVE the one about results requiring time to play out. So “Pay for Performance” doesn’t only stymie risk taking, it also makes us seek quick wins, and avoid long term, innovative thinking.

    Bottom line? Pay for Performance is just another “cop out” for the weak/poor manager. Instead of actually building a relationship, developing a vision, guiding and coaching your workers…use “pay for performance” to motivate them! The best places to work don’t use gimmicks and “tools” to manage their people. They actually care about the business and about their most “valuable” assets – their people.

    Great article! Thanks Stacey!
    P.S. One of the most misused tools for managing people (taking the easy way out) is metrics. That’s why I applaud your work in ensuring metrics are used properly.

  9. For anyone who has doubts or questions about Point #1, Deming’s “Red Bead Experiment” should be required reading: http://www.redbead.com/

  10. Susan says:

    WOW. This was a very refreshing article. I think it summarizes things that I have felt but have not been able to verbalize. My company does not use ‘pay-for-performance’ or really any metrics/kpis, and I see that people become complacent because of it. We are trying to put KPIs into place but your article makes me think we shouldn’t. What would be the answer to this dilemma?

Reprinting Articles


You are welcome to use articles from the Measure Up blog, with these requirements

Connect with Stacey


Haven’t found what you’re looking for? Want more information? Fill out the form below and I’ll get in touch with you as soon as possible.





*We respect your email privacy.
PO Box 422
Samford, Qld, 4520
Australia
Stacey Barr Pty Ltd
ACN: 129953635
Director: Stacey Barr
Simple Share Buttons