The Laws of Gravity Apparently Do Not Apply to Compensation…

Pay for performance is a lie.  The premise is that if an employee, or group of employees, achieves results above some predetermined level, extra compensation will be awarded.  There are many flavors of pay for performance from individual and group bonuses, profit sharing, gain sharing, spot rewards, etc.  It is not a flawed idea per se, simply incomplete.

When does performance justify pay decreases?  I agree that many organizations value performance. However, they do not truly walk the talk.  Without exception, the implementation of pay for performance involves paying out for exceptional performance but never includes provisions for decreasing pay when performance falls beneath a particular level.  Why not?

One of the chief concerns shared with me by practicing leaders in the field is that they simply do not know how to motivate the “dead wood.”  Deadwood, of course, refers to those employees who are asleep on the job, phoning it in, or are otherwise chronically underperforming.  Deadwood exists for many reasons including weak performance management systems and flawed hiring practices.  One underexamined explanation is our dominant approach to compensation.

Please do not get me wrong.  I am a people expert and always seek to find ways to be pro-people when examining organizational issues.  Yet, I am also a zealous advocate for maximizing organizational potential.  Supporting both of these ideals simultaneously requires some give and take.  Forgive the cliché, but it does take two to tango.

If the organization is expected to be progressive in the pursuit of pay opportunities for instances of great performance, it should also be able to pay less than the norm when individuals and teams chronically underperform.  There are many ways to address chronic underperformers including:  reshaping their role, adding more work to their plate, or expensive options such as training, coaching, and mentoring.  However, the most effective might be the tactic that is never used – changing their compensation.

You might suggest that lowering chronic underperformers’ pay will lead them to produce lower quality work or that it might lead to feelings of dejection and insecurity.  That is possible, but not terribly likely or consequential.  What is more likely is that the organization will be viewed as sending strong signals about the value of standards, achievement, and high performance.  The likely outcome for most employees who experience a pay decrease is increased performance!

I am keenly aware of the need for positive employee relations, positive work cultures, and positive communications at work.  In fact, I am suggesting that when these aspects of work life are in place, the ability to have open and honest discussions about performance, as suggested here, is supported.  Under these circumstances, deadwood would wake up fast.  Some of them may choose to leave the organization. That is fine – now you have the opportunity to hire more effectively.

One of the toughest leadership lessons concerns the tradeoff between maximizing each individual’s growth in the organization versus maximizing overall organizational performance.  Reducing pay can be an honest and transparent and fair response to chronic underperformance.  I am not naive.  I understand that there are many legal, organizational, and other barriers associated with such a practice.  Inertia alone makes changing the status quo difficult, especially when dealing with compensation issues.

Nonetheless, if you and your team want to have an honest conversation about pay, and if you and your employees want to have an honest dialogue about performance, you must consider this perspective.  Why is it compensation always goes up but never comes down?

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  1. Frannyo says:

    We’re doing this, and have been doing it for a year or so. We’re a consulting company, so every employee has a very clear sense of his or her deliverables, mainly billable hours. The people who’ve been at the bottom in terms of performance are given a (generally slight) cut and put on a 3-6 month performance plan. So far, half have walked, if not right away, at some point since then. Half are still here, with varying degrees of engagement.
    Interestingly, even though coworkers have to pick up the slack when someone under-performs, we’ve found that you also have to actively manage engagement with that person’s coworkers when you make that pay cut. (At least at our company, where we have open salaries.) We did have a couple of strong players start looking once they saw what was happening to their under-performing peer’s pay, even though it was, in part, to pay the strong player more.
    The only other comment I have is that you have to be sure you’re doing this consistently, that they know what they have to do to get their full salary back, and if they’re rocking it and you have their full attention again, you might consider shortening the time period of the decreased pay, to show them you appreciate their good faith effort.

  2. Tim Sackett says:

    Todd –
    I tend to agree with you and with Frannyo – I’m political that way! I also work for an Agency and we definitely have pay for performance, where pay decreases as someone’s performance decreases – because we pay salary plus commission – so if you don’t do well – your pay will definitely decrease over time. But I do agree with you on that 99.9% of corporations can’t figure out Pay for Performance – because they never have the guts to go backwards, only forwards with pay. It is the one thing that I feel could revolutionize corporate recruiting teams – is if they went to a commission based model – and only were paying for those recruiters who performed – but I’ve yet to find one that has!
    Great post,

  3. Tim Ruef says:

    Todd: I agree with you that chronic underachievers – should be paid appropriately. Where some bigger companies might want to start though is by simply providing no increase to those who don’t contribute. It amazes me how many companies still award a piece of the pie (albeit small) to these employees just because they have always done it this way.

  4. Brn says:

    The article confused the hell out of me until I got to the bottom and read: “tenured professor.” The disclaimer should be at the top of the article.

  5. Hogwash!!!!! This is only an escape for poor management with the exception of those jobs that are salary plus commission or bonus.
    To cut an employees pay that is strictly salary for under performing is punishing the employee when it is management that hired them, trained them and is partially responsible to insure their success. A leaders job is to inspire maximum performance.
    Just “Weed the Garden” and if too many weeds are growing it just might be the fault of leadership.

  6. Sean Conrad says:

    I think the answer to doing it right is variable pay.
    Our company walks the talk – a significant chunk of my total compensation is variable and tied to quarterly acheivement of goals or MBOs. Sure outstanding performance or competitive market situation may still dictate an increase in base as well as how much variable an employee is eligible for – but most of the “pay for performance” is based on this variable piece. It means an employee is “phoning it in” and not acheiving MBOs (which are over and above what you would consider just “doing your job”) well they take home less money that quarter.
    So I agree that if all you are doing is adjusting base salary – in that regard Pay for Performance is often a lie in that you never do go down. A combination of adjusting base + a significant variable pay component tied to performance is not a lie and is true pay for performance.

  7. alan haveson says:

    great perspective….the article should be shared
    with …at the very least…all managers!!!

  8. G Jackson says:

    This only works if you have poor performers left. Our company has done several layoffs due to the recession over the past few years. The first people to go were the under performers. We’ve also had to do paycuts for employees that are left, who are doing more work with fewer people. We would not be able to hold onto the remaining high achievers with this strategy.

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