An article by Carly Chynoweth, in the Appointments section of the latest Sunday Times (5.2.12), includes a refreshing challenge by Warwick Business School professor, Bruno Frey to the notion and practice of performance-related pay. The article was no doubt prompted by the current furore over the size of executive bonus payments and other 'rewards for performance'.
Referring primarily to the pay of CEOs, Frey’s main suggestion is that target-based approaches to bonus payment should be scrapped. He argues that any such pay should be based instead on an annual, retrospective judgement about the nature and extent of bonus that a CEO’s performance merits.
Several of his points resonate strongly with those I have made in earlier posts, such as Building commitment –v- rewarding performance and Public sector pay review – Off target. At the same time, his notion of an annual appraisal, based on hindsight, still assumes a degree of objective knowledge about the causes of performance outcomes that I don’t believe is credible in the socially complex world of organizations.
Frey draws attention to what he sees as a number of flawed assumptions in the cult of pay-for-performance, including (with quotations from the article in italics):
- The presumed positive impact of personal targets on organizational performance.
“… Executives may focus too much on doing what is needed to meet their performance criteria at the expense of other tasks – even if these are more important.”
- The ability of the ‘assessor’ to make a meaningful judgement in advance of what good performance would look like, in order to set targets in the first place.
“This is almost impossible to do with any degree of certainty, particularly if circumstances change.”
- The validity of ignoring the impact that other factors and other people’s contributions have on actual outcomes.
“It is impossible to define all these cases beforehand, but you can see them afterwards.”
- The motivational impact of money, as opposed, say, to “awards and other forms of public recognition.”
Frey maintains that his proposals are more relevant to senior-level pay than to that of others in the organization, because of:
- the wide range of factors that impact upon organizational outcomes and make the CEO’s personal contribution less easy to see;
- their ability to influence the structuring of their personal performance measures to make them more readily achievable; and
- the marginal motivational impact of money to those who are already well paid.
And he goes on to say,
“Performance is not something objective – it must be defined – and the chief executive has a lot of possibilities to undermine and bias what those criteria are.”
Frey also acknowledges that settling upon an appropriate (and politically acceptable) body to make the end-of-year assessment of performance could be problematic.
Comments from an informal coalitions perspective
Although Prof. Frey directs his attention to top-level pay, I believe that his fundamental arguments apply equally well to pay-for-performance schemes in general. As with many of the tenets of conventional management wisdom, linking pay to performance seems an obvious thing to do – from considerations both of fairness and motivation. But, as Frey suggests – and as experience shows – the actuality of organizational performance is considerably more complex.
Whilst agreeing with the main thrust of Frey’s argument and conclusions, the complex reality of organizational life means that I would question his statement that “…you can see [the connections between outcomes and contributions] afterwards.” Some of the factors contributing to supposed under- or over-performance might well be more visible after the event, but the causal links would still be impossible to untangle definitively. And none of this would answer the question as to what might have been achieved if other approaches had been adopted instead. We simply wouldn’t know.
In Informal Coalitions, I describe how outcomes arise from the complex (i.e. a-rational, unpredictable and uncontrollable) social process or everyday interaction. This recognizes that performance outcomes (as opposed, say, to particular outputs) cannot be traced back to the specific contributions made by individual participants – whatever their position in the organization might be. The power relations in organizational situations are always weighted in favour of some individuals and groups relative to others. And often the power differences are substantial ...
... but no single individual - however senior - can account for the specific performance outcomes that emerge.
So to base people's pay on the presupposition that they can is not helpful – either in terms of providing people with equitable rewards or in enhancing leadership and organizational performance. Unfortunately, the belief that specfic performance outcomes can be attributed unproblematically to the actions of particular individuals is almost universally held. This is the case even with those who argue strongly against the current situation - whether on the basis of absolute levels of pay, comparative fairness, ethical practice, or whatever.
I would maintain that most managers set out with the intention of making a worthwhile difference in the complex, uncertain and ambiguous conditions in which they find themselves. But established performance measurement and reward mechanisms hinder rather than help them in this task. These imply that they - and others - enjoy a level of control over outcomes that is far removed from the reality that they experience day to day. The sooner that managers - and those who comment on their performance - recognize this reality, the sooner that the focus of performance dialogues can move away from a 'mechanical' preoccupation with targets and 'scoring' towards the interventions intended to enable people to excel.
Here, of course, as in all other aspects of their work, managers can act with intent but they cannot be certain as to the outcomes that will eventually emerge.
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