PERFORMANCE-RELATED REMUNERATION IN THE BALANCE

How useful is performance-related remuneration? And how do you organise it as efficiently as possible? These questions have troubled employers for decades. As a spin-off of Ghent University, The VIGOR Unit researches the advantages and disadvantages of performance-related remuneration at the request of organisations looking for the best possible strategy for their employees.

Cedric Velghe of VIGOR holds a nuanced opinion, but still seriously questions the usefulness of excessive perfomance-related renumeration. “Everyone who has a dog or children knows that you get things done by offering a sweet or some money”, he laughs.  “But there are always side effects. People quickly become resourceful to optimise their bonus. And it often happens at the expense of collegiality.”

Recent studies have shown that the difference in perfomance between colleagues is often very limited. And then the effort is often not worth it.

Velghe: “For a long time, people thought there was a small group of top performers and a small group of underperformers, with a group in between the two whose performance was close to the average. But that is not true. American researchers have concluded that in many sectors, 80% of employees perform below average and 20% firmly above average – sometimes even ten times better than average. Moreover, significant differences can be noticed in that group of top performers. For example, the best may score twice as high as the second best. But within the big group of 80 per cent, the differences in performance are relatively small. If you pay on the basis of performance in that group, you differentiate way too much between peers. Because regardless of their difference, they all actually contribute about the same amount in their own way. Extensive performance-related remuneration may lead to dissatisfaction. With the large group because differences are weighted that those employees do not feel are fair. And with the top performers because they still feel under-acknowledged. Because the extra compensation is not in proportion to their actual performance.”

So should performance-related remuneration be scrapped?

Velghe: I would not go that far. You can measure the individual performances of top performers and reward them accordingly. But for the vast majority, it would probably make sense to scrap the system. It would be better to assume that they do their job well and reward them all in the same way, with a predictable wage path. This can be done through wage scales, but employers can also commit to checking every year whether their pay is still in line with the market and let it evolve through such an annual check.

If you scrap performance-related remuneration for a large group, then what do you do with evaluations?

Velghe: The same thing. It is not useful to evaluate everyone extensively. There are several reasons for this. Not only are there hardly any differences worth mentioning, but in practice it also turns out to be very difficult to measure performance objectively. Research shows, for example, that managers give better scores to employees they themselves have hired or with whom they identify. People of the same sex are also often rated slightly higher. And knowledge work in particular is difficult to quantify. What is an individual performance and what is the result of a team effort? To which extent are results determined by an external context over which the employee had no control? And what do you think is important? Being punctual? Taking risks? Creativity? A lot depends on the company objectives. They are different for a company that wants to offer the lowest price than for a pioneer who mainly focuses on innovation. In short, it is difficult to give an objective interpretation of performance.

So evaluation should be scrapped as well?

Velghe: That is also a bit too simplistic. I would mainly focus on the top performers. Managers could potentially nominate their employees as ‘top performers’ by means of a thoroughly substantiated dossier. This would then be assessed by an expert panel. And those who are confirmed to be top performers, may receive individual rewards. And you could have an evaluation interview with those at the bottom of the ladder, who are underperforming. But evaluations make little sense for the vast majority of employees. It is better to invest your precious time in the things that do make a difference: at the bottom and the top of the ladder.