Does Paying People More Get Better Performance?

You usually get what you pay for with many things. A Mercedes is a better car than a Nissan Micra; at least from a reliability and driving experience point of view. Buy cheap, buy twice is an old adage that if you skimp on quality you often get unreliability.

So it goes with pay, we assume. The market sets pay for scarce skills – the reason footballers get paid astronomical salaries is that their skills are rare, and the market therefore drives the price up. At least their skills are testable on the playing field.

What about CEOs? You have to pay the going rate is the clarion call. Pay a CEO a normal sum of money and he just won’t be bothered to roll out of bed and do the difficult job of…losing shedloads of money like Fred the Shred, Kenny-boy Lay (deceased), Rick Wagoner. People moan about footballers’ salaries, but if they performed like that on the field scoring repeated own goals they’d be out on their ear PDQ.

Paying shedloads of money is one thing, but there is a hidden assumption behind CEO pay, and curiously enough it doesn’t seem to hold up to testing. You would think it stands to reason that paying someone more if they do well is a good way of getting better performance. Funnily enough, it turns out that this is not the open-and-shut conclusion of studies, indeed the converse seems to be true, as it encourages excessive risk-taking and a lack of self-critical thinking. Sounds familiar?

Here is an interesting video that describes the results of some tests of this assumption. It turns out that for simple mechanical labour, you do indeed get more performance out of people if you pay them more for more production. But once things become even slightly cerebral, and that includes simply memorising strings of numbers, paying people for results breaks down, often wrecking the performance compared to paying them a regular wage. There is, of course, the caveat, that you have to pay them enough so that pay is no longer a concern. Paying enough to keep you and I happy may not be the same as paying enough to keep a CEO happy, since they have a more expensive lifestyle. However, continuously ramping pay doesn’t seem to be necessary at all, so perhaps it is time that we as shareholders challenged high CEO pay.

Before the pointy-haired-bosses reading this get any ideas, the conclusion was not that pay is irrelevant, right. Pay zilch and nobody turns up for work. You have to pay enough, so that the issue of pay is not a concern. However, after that, giving people more self-determination in their work, and letting them achieve mastery over the tasks in hand, ie improving their skills, is largely reward enough, and you get an engaged workforce. Changing things in this directon from the usual command and control hierarchy is very difficult. It means changing a culture, and that is notoriously hard to do. It’s probably more expensive in the short term than upping pay – a fair amount of senior management may need to be re-educated or made redundant 🙂

There is a corollary to this. Most people assume that more pay will make them happier. That isn’t necessarily so as this post from Monevator seems to indicate.

As I think back over how my own job has changed in two decades, much of this gels with me. Two decades of MBA-as-career has given us in the western world an increasingly talentless management in too many of our larger companies that attempts to micromanage everything, and make people interchangeable with each other. In doing this, companies introduce far more ridiculous reporting and under-the-microscope sort of activity. These companies have been able to get away with that because the past couple of decades have favoured capital as a result of globalisation.

Economies of scale and wage arbitrage in outsourcing work to lower-wage economies can be used to offset the sclerotic process that is seizing the creative arteries.  Just because technology allows something to be measured, doesn’t mean it should be, and this has been death to creativity, and has led to a diminished engagement as people feel their contribution is valued less.

In my company, this has gone against a backdrop of deskilling – digitalisation has genuinely reduced the skill levels required of a lot of the work, and the weakening business case of the company makes management correctly shake out some of the fat from what was once quite a prestigious organisation. However, I recognise this trend to ossification, risk-aversion and micromanagement.  The company I work for follows the trend across western business and education, with the emphasis on objective setting, SMART (specific, measurable, achievable, realistic, time-bound) goals and all the rest of the manage-by-numbers claptrap.

W Edwards Deming - Out Of The Crisis book
Deming's book, Out Of The Crisis

Perhaps it is not surprising that the developed world is driving our economies into the ground – in our search for measurable results we are trashing the performance, job satisfaction and quality of life of the knowledge workforce at the same time as real incomes stagnate.  No less a luminary than W Edwards Deming, in his book “Out Of The Crisis”, had this to say

“The performance appraisal nourishes short-term performance, annihilates long-term planning, builds fear, demolishes teamwork, nourishes rivalry and politics… it leaves people bitter, crushed, bruised, battered, desolate, despondent, dejected, feeling inferior, some even depressed, unfit for work for weeks after receipt of rating, unable to comprehend why they are inferior. It is unfair, as it ascribes to the people in a group differences that may be caused totally by the system that they work in.”

I know that for myself, I am reasonably happy in what I do, and the pay is okay.  I have progressed through the company, gaining rank and pay as the job demands more skill. At the moment, I am working in a niche built on experience gained a few years ago – the rest of that group has been disbanded or take early retirement, so I have a reasonably challenging task that will result in something real on the ground.

What has made me virtually disengage with the company’s aims is the “performance management system” that I find alienating and positively demotivating each time I have to deal with it each quarter. I had no problem with the yearly appraisement process before, but this particular micromeasurement technique with its talk of raising the bar every year makes me want to puke. I am old enough to be able to mostly feed this revolting system what it wants, so I am okay in the metrics.

I will perform the task to the best that I can because that is the professional thing to do, and I don’t want to let  people down; but as for HR’s infernal performance management system I’d walk away tomorrow to get that out of my life. Let us take a look at the mission statement of SuccessFactors, the fly-by-nights that produced it and sold it the the HR department of my company.

Our integrated suite of on-demand applications is relied upon by thousands of customers worldwide to align their businesses to their strategies, arm their organizations for success and incite their employees to greatness—every day.

By focusing on two key elements of executional excellence, Business Alignment and People Performance, SuccessFactors helps organizations of all sizes realize maximal business results. Execution is the difference™.

Too bloody right they are. Execution – as in the killing off of creativity, innovation and pretty much anything worth having in a workforce. Of course, the SuccessFactors software is the means of disengaging the workforce. The true problem is the pillocks in charge of companies that believe that micromanagement by SMART objectives are the way to get the best out of their knowledge workers. This sort of micromanagement is why office work is bad for you. It saps your soul. The tragedy is that it is a lose-lose situation – the company doesn’t get a better deal for sapping your soul!