The myth of pay for performance

IT'S that time of the year again. Employees being appraised and managers making recommendations about bonuses and salary increases. Pay for performance, which is a much repeated slogan, is a staggeringly banal statement. To say one pays for performance is like stating that the rain is wet. Besides stating the obvious, there is the deeper problem of elevating compensation as the central motivator of performance. And, in practice, do people really get paid for performance?

The relationship between performance and pay is tenuous, except for a few roles such as salespeople and traders. What employers mean by pay-for-performance and what employees expect are often two different things. It's a beguiling simple promise but hard to deliver.

Fairly and accurately measuring individual performance is not that simple. Outcomes are a composite of individual contribution and external environmental factors. How do you separate the two? When results exceed goals, employees are quick to attribute it to themselves. When goals are not met, employees claim it has nothing to do with them but everything to do with externalities. In complex systems such as a business, cause and effect is neither linear nor certain. Financial results alone are a crude guide for measuring individual performance.