Decoupling appraisal from pay increases LO19851

Doug Merchant (
Sat, 14 Nov 1998 22:07:11 -0500

Replying to LO19845 --

>I think that automatic raises related to time in service and promotions
>are, at least in some segments of the market, no more of this day and age
>Pay raise should be related to performance because that what it's all
>about. You sell your quality to an employer and depending on the level of
>the quality in relation with the performed tasks you are rewarded. This
>should be the point of view form the employer as well as from the
>employee. I would hate to be part of a system that rewards we in terms of
>time in service or promotion.

>Gijs Houtzagers

Absent being the low cost producer or having a priviledged access to a
scarce input, in Marketing 101 taught me to avoid competing on price,
instead differentiate the product or find a market niche.

Isn't "pay for performance" simply "competing on price" for the employee's
skills and behaviors? Aren't shareowners better served when they receive
the incremental performance without yielding the incremental pay? And, in
some firms, aren't employees willing to freely give more than managers
would think to ask?

Not only is money an inefficient motivator of behavior, it can be
ineffective as well. That is, extrinsic rewards can reduce the intrinsic
joy of work. By destroying intrinsic value, pay for performance can reduce
the total stakeholder value distributed by the firm.

Of all the firm's stakeholders, employees have the most complex
transaction relationships with the firm. This rich relationship offers
the greatest opportunity to create non-monetary value. However, pay for
performance drives the distribution of stakeholder value to a zero-sum
game between employees and shareowners. Why does this benefit either the
shareowner or the employee?

In addition, pay for performance sifts financial risk from shareowners who
can diversify the risk to the employees who can't. This redistribution of
risk reduces the total stakeholder value available for distribution to any
of the stakeholder, further reducing stakeholder value.

I agree some situations suggest highly leveraged compensation plans. For
example, in sales situations where: 1) salesmen can be assigned a "fair
bag", 2) each sale is an independent event, and 3) the firm knows the
incremental profit per unit of sale. Encyclopedia sales come to mind.
However, in these cases the transactions is so completely specified that
an employment relationship probably isn't the most effective way to govern
the transaction.

While I don't mean to suggest firms should pay for poor performance or pay
for "good looks". I'm just suggesting that pay for performance has become
an Human Resource mantra that requires some thought.

Doug Merchant
Currently On Career Sabbatical


"Doug Merchant" <>

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