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?