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Again: Performance Related Pay does not work

16-polly-toynbee_997297cIn September, I commented from my own experience in business and others’ experience in other sectors on Michael Gove’s proposal to introduce performance related pay in teaching. It is particularly pertinent for me practically, since I am on the appraisal group for the head of the school of which I am a governor. Apart from the damage it will do, I comment that:

…the most disturbing thing about this and other recent proposals is that they are based on no evidence at all—or even that they fly in the face of the evidence.

This week, Polly Toynbee offered more critique of this approach, across all sectors, demonstrating that this ‘carrot and stick’ approach feels good, but all the evidence shows it does not work.

Some bad ideas never die. Staked through the heart and dowsed in garlic, still they rise. No amount of evidence has killed off a near-religious belief in performance-related pay. Most research finds it useless or damaging, but faith in gut instinct conquers evidence when governments and managers need to believe it. That’s how they feel in control against the moral hazard of idleness.

She highlights the disastrous increase in banking bonuses, without any correlated improvement in the banks’ performances. But PRP has been causing problems for a long time.

For Remembrance Day, here’s a good example: when the Luftwaffe incentivised its pilots to target Spitfires, its bombers were left unprotected and so shot down in greater numbers. The same perversity is found in banking: Hampton blames the mis-selling of payment protection insurance on pay incentives, resulting in massive sales – and now massive fines.

The effect of introducing PRP has been to make pay within any given sector more and more unequal. This has happened in banking; it is now beginning to happen in teaching as well. And this growth in inequality acts as a serious disincentive to the majority of workers. This points to the kind of system that does work well, which is just the kind of system I experienced when making chocolate: to have all workers’ pay at every level related to overall business performance. This not only motivates, it also educates. If everyone’s pay is related to (for example) the company’s profitability, or return on assets, then everyone starts to take an interest in what this means and how it words.

Toynbee concludes:

Why the obsession with performance-related pay, amid this high- and low-pay crisis? Management by carrot and stick feels effective, even if it does no good. Financial incentives that work best are collective ones, with all staff rewarded together – John Lewis being the classic model. Yet PRP retains a mystical grip on this government, justifying high pay while dividing and ruling the public services.

I wonder what it will take for Government to start acting on the evidence.

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7 Responses to Again: Performance Related Pay does not work

  1. Emlyn Williams November 17, 2013 at 8:31 pm #

    Yes, the John Lewis model seems equitable, and recognises that people make a valuable contribution even if they don’t generate profit directly. The other day someone told me that privately-owned Bloomberg told employees in 2010 that if revenues hit $10 billion in year to June 2014, everyone would receive a bonus of 70% of salary. It seems that it’s seen as fair because everyone benefits, and possibly makes it worth staying with the company. No doubt they are on tenterhooks – and maybe there will be an exodus in August next year!

  2. Emlyn Williams November 17, 2013 at 8:32 pm #

    I wonder what the implications and possbliities are for clergy?! Some years ago I saw a church advertising for an evangelist and offering performance related pay…

  3. Ian Paul November 17, 2013 at 8:58 pm #

    Good grief! Amazing! Wouldn’t the John Lewis model imply that all the congregation and clergy and other paid staff should all benefit together…?

  4. James Goodman November 17, 2013 at 10:34 pm #

    I may have commented on this before. One of my colleagues in Bangor University’s school of psychology conducts research into well-being in the workplace. He recently presented a table of the top 10 motivators for employees; these are quite different for the ‘contented’ versus the ‘disgruntled’ employee. For the former, money is way down at the bottom of the list and for the latter it is right at the top – which suggests that PRP is a literal waste of money (in the former group it’s not a significant motivator, and the latter are already thinking about jumping ship!)

  5. Ian Paul November 17, 2013 at 11:21 pm #

    That’s really interesting—thanks, James.

  6. Andy Batchelor November 18, 2013 at 12:50 pm #

    My experience as a TU rep suggests to me that some companies love PRP because it gives management/HR an easy way to constrain the pay bill. A few examples – apply a ‘forced distribution’ of appraisals, where levels of performance have to fit a predetermined ‘bell curve’ graph, where the majority of employees are expected to perform at an ‘acceptable’ criteria, with a smaller number exceeding this, and an equivalent number expected to be underperforming. This artificial constraint of course completely undermines the concept of individual performance being reflected in pay. It is also very easy to introduce hurdles for employees, such as directing managers to insist that every criteria and objective is exceeded in order for an employee to receive an above-average assessment. This means that someone who is doing a great job with customers and really benefitting the company is prevented from having this recognised in their pay level because they may have failed to submit one timesheet on time!

  7. Ian Paul November 18, 2013 at 12:56 pm #

    Andy, that’s interesting, and also demonstrates the process of mechanisation of judgements about performance. I loved Polly Toynbee’s example from the Second World War.

    But her other point is that, whilst it might constrain some pay bills, it actually exacerbates pay inflation at the top end, and also exaggerates inequality.

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