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There is little merit in merit pay

REWARDING PERFORMANCE

There is little merit in merit pay

Merit pay schemes are seen by many as one of the answers to the challenges facing organisations today - from delivering organisational change to motivating staff and rewarding employees fairly for their performance. But a new study by the influential HR thinker Jeffrey Pfeffer suggests that more collective forms of reward are frequently more effective and are more consistent with people's desires for a more equal distribution of rewards.

In Business and the Spirit: Management practices that sustain values, Pfeffer, professor of organisational behaviour at Stanford Graduate School in the US, sets his sights on the ghastly basic mistakes managers make when they fail to question underlying beliefs. His attack on quick fixes and fads will find favour with many sceptics.

Pfeffer's contention is that all too many popular management ideas are self-defeating. His aim is to reveal which management practices are destructive of the "spirit and values" - and he has no qualms about exposing what he sees as the often erroneous advice provided by consultants that serve to undermine employee motivation and job satisfaction.

Misgivings about merit pay

Pfeffer has long campaigned against individualised rewards. His central thesis in that merit pay seldom encourages higher levels of achievement, serves to undermine teamwork and encourages a short-term focus.

What's more, in his latest study, Pfeffer observes that employees actually favour a more egalitarian allocation of rewards:

"One of the most frequently heard complaints from human resource managers and compensation and other consultants is how hard it is to get supervisors to differentiate in their raises between the best and worst performers. Instead of seeing this behavior as some sort of 'problem', one might ask: what does this tendency to pay people more equally (than the experts suggest you should) suggest about people in organisations? One thing that it certainly suggests is that, left to their own preferences, people prefer a more equal distribution of rewards, which is precisely what various studies have found."

Collective forms of reward and recognition more effective

Rather than withdrawing from performance-related pay altogether, however, Pfeffer advocates moving towards more collective forms of reward - such as gainsharing, profit-sharing, employee stock ownership and company-wide bonuses. "More collective forms of reward are at once frequently more effective and more consistent with people's desires to achieve connection with others in the workplace."

With collective rewards, pay is still "very much at risk", says Pfeffer, but salaries are not determined by how well one person does in competition with another, but instead by how well the total system performs. "A more collective reward structure diminishes the internal competition that retards knowledge sharing and helping others, a big problem in interdependent systems. It also helps to develop a greater sense of community and common fate, thereby increasing the strength of social bonds of people to the organisation and to each other."

What people value at work

Under the microscope are what Pfeffer calls the "four fundamental dimensions of what people seek in workplace".

"These ideas about what people want at work also help us understand why some management practices work, and why other do not," says Pfeffer.

  • "Interesting work that permits them to learn, develop, and have a sense of competence and mastery."
  • "Meaningful work that provides some feeling of purpose."
  • "A sense of connection and positive social relations with their co-workers."
  • "The ability to live an integrated life, so that one’ s work role and other roles are not inherently in conflict and so that a person’ s work role does not conflict with his or her essential nature and who the person is as a human being."

Pfeffer argues that all too much conventional wisdom about the way we manage our people and reward them - take, for example, maximising shareholder value - actually serves to destroy people's "spirits and values".

A final word

"We have come to somehow, almost unconsciously, accept the idea that the ends justify the means. If organisations need to be centralized, lean and mean, impermanent, and control-oriented in order to succeed in the marketplace, this is the way it is and we need to accept these facts. What this chapter has suggested is that the premise is wrong and so is the conclusion. As to the premise, the evidence continues to grow that organisations that have and live by their values, that put people first, and that manage using high commitment work practices outperform those that don’ t." - Jeffrey Pfeffer.

Want to know more?

Title: Business and the spirit: management practices that sustain values , by Jeffrey Pfeffer, Research paper no. 1713, Graduate School of Business, Stanford University, USA.

Availability: To download a copy of the report, free of charge, in PDF format, click on this link . . .

http://gobi.stanford.edu/ResearchPapers/Library/1713.pdf

Posted 15 April 2002