Why you should separate salary and performance

As school was out for summer break my kids brought home their reports. A few marks they didn’t agree with, but I was super proud of them regardless. So how could I express my pride through a reward?

I remember that I always got a couple of guilders from my parents. My grandparents even pressed ten guilders into my hand when I visited with report in hand. Upon leaving, I would go directly to the store to buy ice cream with my reward. So, it seems to make sense to reward my daughters with a bonus for their reports, right? But it’s not that simple.

What I took for granted as a child, I have a harder time accepting as a parent. I am proud of my children. But it always seems it needs to be linked to financial rewards. Some friends figure that the higher the marks, the higher the rewards.

Pattern of reward and punishment

A child nowadays grows up in a world where rewards (and punishments) are embedded. At school, you get a sticker from the teacher for the right answer. And, at home you get an ice cream for stacking the dishwasher. This sets the tone for life.

And the pattern continues in working life. No wonder we come to think that if you perform well, you’ll receive a financial reward. The other side of this coin is if you perform less or stop performing if there’s no prospect of a reward.

Meanwhile, people just basically want to do well and grow. They and we are intrinsically motivated to deliver good performance. Nevertheless, companies continue to link financial incentives to performance.

Arguments

Maybe you agree with me and maybe you don’t. But if you’re looking for reasons to decouple performance and financial rewards, here are a few:

1. Intrinsic motivation leads to better performance

Research shows intrinsic motivation leads to better performance. People become more creative and work better together. Moreover, extrinsic motivation (financial) can lead to poorer performance (read the book Drive by Daniel Pink).

An example? People can start working with tunnel vision and adopt what the Dutch refer to as ‘elbow work’ (pushing others aside with one’s elbows as an ungracious way to treat competition) instead of working together. Besides, performance targets given at the start of the year can become unfeasible during the year. Or you perform incredibly well in areas for which you were not rewarded because they were not designated targets.

2. The Dunning-Kruger Effect

Performance rewards are (usually) given by managers in performance reviews. Even if you get feedback from your peers, the Dunning-Kruger Effect still plays a major role. It says it’s human nature to overestimate our own skills and achievements. Most of us think we perform at above average level. Mathematically speaking, that’s not possible.

Equally, the manager may feel he has above-average skill for assessing employee performance. It’s dangerous to link financial rewards to the performance of an employee in that context.

3. The Peter Principle

In organizations with traditional hierarchies, employees rise to their level of incompetence. Then they cease to add to the success of the organization.

You probably know an example of the best craftsman or professional being promoted to team leader and manager, while the best accountant, painter or customer service employee is in not guaranteed to be the best manager. So, there are quite a few incompetent managers around who, driven by the Dunning-Kruger Effect (see above), still carry responsibility for assessing performance and the salary consequences.

4. Iceberg of Ignorance

This theory from 1989 assumes that the higher you climb in the hierarchy, the less you know of the problems, challenges and achievements on the work floor.Thus there is a lack of information to be able to properly assess staff performances. And yet managers, elevated within the hierarchy, are expected to judge their employees on performance.

5. Conflicting interests in the traditional managerial position

Dutch professor Kilian Wawoe describes (in Performance Management in an Agile Work Environment) that a lot is expected of a manager. For example, being a good coach, having an inspirational talk with someone not feeling at their best, or motivating them to pursue a dot on the horizon, etc.: the ‘soft’ side, so to speak.

But you are also expected to set top-down priorities for the team, distribute work optimally so that targets are achieved and, at the end of the year, present a motivational and substantive performance review.

You do all this while maintaining a safe, open atmosphere and providing people with constructive feedback. Then you can translate all this into the right increases for the employees who deserve them – while working with a limited budget. No wonder few are beaming with enthusiasm after an annual performance review…

Open to discussion

Some of the studies above are open to discussion. But if only half true, I’d still advise taking a critical look at classic performance management, and the cycle that consists of setting goals, turning judgements into scores, and the consequences for salaries.

In addition to lots of time, money, frustration and paperwork, it can even be dangerous. Moreover, it doesn’t fit well in today’s agile working environment. So what is the alternative?

Performance disconnect

At Viisi we have completely decoupled performance and salary development. Everyone in the same field is given the same salary increase. It is then up to the teams to come up with roles, divide the work, supply each other with feedback, and achieve their goals together, without being sidetracked by salary issues.

We also divide the manager function (with the help of Holacracy) into different roles, and assign them to people who have talent for them, and therefore not to one single person who, because he or she is the manager, must be capable of doing everything.

And what about rewards? Just pay people a decent salary. And hand out ice creams for fun, because they’re delicious. Believe me, that ice cream will taste infinitely better. Enjoy! 🙂