Performance-related pay and the importance of recognition

I never took kindly to the idea of respecting my elders and betters. There is a fallacy in that smug paternalistic expression - because your elders aren't necessarily your betters. As it happens, I have immense respect for a number of people from an earlier generation, because they have seen and experienced more than I have, and learnt from their experiences. It's not age that makes the difference, though, because many of their contemporaries remain as ignorant now as they were then, despite all their extra experience.

In exactly the same way, seniority at work is no guarantee of wisdom or judgment, or anything else. Let's face it, in every organisation, there are passengers - people whose only talent is survival. Usually this requires an ability to size up the situation, find out where the power lies, learn the strengths and weaknesses of your colleagues and understand how the system works. Then, depending on the organisation, it may be possible to survive without doing anything useful simply by knowing when to look busy, when to smile, and when to shout at someone weaker or flatter someone stronger.

Just ask some of those brilliant head teachers who have turned round failing schools and you'll find that one of their hardest tasks will have been to get rid of the underperformers, the long-serving teachers who were determined to collect their generous pensions but incapable of changing their ways, learning anything new, or giving the pupils what they needed.

This is not a minor issue. It's about making sure that all the good work your top performers are doing is not undermined by any weak links in the chain. Right now, as businesses across the globe struggle to emerge from recession, is as good a time as any to take stock, make sure that no one is holding you back, then set about introducing a reward system that ensures everyone is paid according to what they do, not how long they have served.

Performance-related pay is not a new idea, but only in recent years has it been given the attention it deserves. Hewitt's Best Employers in Asia study of 2009 shows that among the best employers - not only the most admired but also the most profitable companies - more than three-quarters use the kind of schemes that reward high performers and give them a chance to share in the company's success. By contrast, only about half of the rest implement performance-related pay; and among the worst, the proportion using performance-related pay falls below 40%. The conclusions are obvious: when you link pay to performance, you get better results.

Things can still go wrong, of course - as the recent credit crunch showed us. In theory, the idea of giving top performers shares or share options sounds like the best possible way of offering a financial inducement that also ties the employee's success to that of the company. But, in practice, a company's fortunes may wax or wane for quite unconnected reasons - as we saw in 2008 and 2009 when many blameless but increasingly disgruntled employees saw their precious shareholdings plummet in value regardless of their best efforts. Another undesirable side-effect was highlighted in an Economist article last year, namely that ‘ruthless managers pursued the goal of increasing share value by any means possible, including lying, fiddling the accounts, bribing investment bankers and backdating their stock options so that they began on particularly favourable days'.

Even if you avoid the share options trap, it still isn't easy to reward on merit. When people work in teams, it's hard to say which member of the team is making the crucial difference. There are also individuals who don't have much opportunity to affect the bottom line, but whose personal qualities enhance morale or help others to work more effectively. It's important, therefore, to set people targets that are appropriate to the role you are asking them to perform.

When it comes to measurement, people are more useful than systems. If you want to find out how someone is performing, it's almost impossible to devise a system that takes account of all the different factors - a person's willingness to collaborate, their ability to motivate colleagues, their personal skills and effectiveness - that may be of immense long-term benefit to the organisation. But if that person has a good line manager and trustworthy colleagues, they will know. All of which makes some kind of performance review absolutely essential.

Another revealing finding of that Hewitt study was that Asia's best employers were much more inclined to involve managers in performance reviews and hold them more frequently. And one result of this was that 28% of staff among the best employers were identified in the ‘improvement needed' category - whereas that figure was only 12% among the rest. On the one hand, then, the whole business of performance review is humane and considerate, in that it gives the effective employee the chance to get their just deserts. But on the other, it is also tough and demanding, as it identifies shortcomings and puts pressure on underperformers.

Even now, such an apparently merit-based system gives scope to bad managers to set inappropriate targets, and make unsound judgments of performance. One way to avoid this danger is to have employees set their own targets - as the US company Constellation Energy does by allowing each of its business units to customise their own performance ratings system, typically combining performance against individual goals with demonstration of the company's core values and performance of specific roles.

With effort and ingenuity, almost any organisation can create a compensation culture that rewards performance. In the meantime, it is worth remembering that money isn't everything. People don't work for financial reward alone. For the great majority, it's about being recognised for the work you do. So while you are developing your own performance-related pay system, don't forget to congratulate people when they do things well. That's the best-value way of persuading your staff to support you.


Mark Dixon is CEO of Regus