HR Myths #5: Pay for Performance

Posted on March 12, 2007 by admin

It's my turn to add to the conversation. [I don't often find time to do that.]

Esther Derby and Jason Yip both find blog column inches to riff off Jeffrey Pfeffer's testimony on the merits of Pay for Performance. I've blogged about this before 3 years ago in a previous HR Myths post.

While I might deal with performance review feedback differently today, three years later, having more experience at these things, my general conclusion remains the same - Pay for Performance can lead to dysfunctional behavior encouraging individuals to look out for themselves and discouraging team working that enables higher productivity from the whole team.

Our annual employee survey interestingly asks the question, "We have a good performance review system?" I wonder if your company asks a similar question of its employees? I can't share our results with you, but draw your own conclusion. Are Pay for Performance schemes universally disliked by a significant portion of knowledge workers?

A couple of years ago, I had lunch with Lisa Haneberg, the crafty middle management blogger. Lisa knows a lot more about HR than I do, and has actually spent time hanging out with HR types at their industry conferences. I asked her whether HR policies come from the tooth fairy or if she could enlighten me on the source of the ideas. Though she knew more than I, she couldn't point me at original work, or authors, to understand the source. [If anyone reading this knows the origins of modern human resources methodologies, please leave a comment.]

I expressed my concern that typical performance pay rules were like cost accounting - somehow left over from a previous era of management. Modern Cost and Management Accounting was created by Donaldson Brown of General Motors to provide a means of making local decisions in mass production manufacturing. Mass production was based on ideas in time in motion study and Scientific Management by Frederick Taylor. This gave us the efficiency metric that seeks to optimize utilization at individual stations on a manufacturing line. It's based on the assumption that optimizing locally (for efficiency) will lead to optimal performance for the system as a whole. The concept has largely been debunked by the Lean and Constraints Management movements. Successful manufacturing companies have abandoned Scientific Management. However, its accounting method, remains the industry standard and is widely taught in colleges all over the world. My curiosity revolved around whether HR policies can be traced to a similar pattern of development. Were they created out of the mass production era paradigm that local optima leads to globally optimal performance? If so why do they continue to persist in the post-mass production era?

Thomas Kuhn described the inertia that exists within a profession and why innovation and new ideas often come from outside that profession. For example, Eli Goldratt, a physicist promoted the Throughput Accounting alternative to Cost and Management Accounting. Ray Immelman has taught us to look for a tribal explanation first. Immelman's model is simpler to understand but amounts to the same thing as Kuhn. He suggests that when a tribe has determined its mechanism for establishing the tribal pecking order - the individual value (IV) within the tribe - there will be huge inertia to changing that mechanism, because it would undermine an individual's ranking in the tribe and cause a loss of individual security (IS). Fearful from reduced security and of loss self-esteem no one wants things to change. The result is that an established profession has no incentive to change. In fact, it has huge inertia to maintain the status quo - hence, Immelman's model predicts precisely what Kuhn observed.

This leads to my observation that, if Cost Accounting survives because it suits the accounting tribe, could it also be true that policies such as Pay for Performance remain ubiquitous because they are deeply ingrained as part of the tribal lore and value mechanism in the human resources tribe?

Interesting then that when Steve Ballmer was looking for a new manager to run human resources at Microsoft, he chose Lisa Brummel, someone from the marketing side of the business with no background in HR. Did he intuitively know that he needed someone from outside the tribe to shake up HR? or was he a Kuhnian thinker who understood the need for a non-HR professional to take the reins? Regardless of which, Brummel wasted no time in abandoning the forced ranking and severely modifying and simplifying the Pay for Performance scheme at Microsoft. Scoble for one was delighted!

Other HR Myths #1, #2, #3, #4