Performance pay – the pros and cons

OPINION: Despite arguments over the years, performance pay in some form is now part of the accepted framework for paying employees. There are some glaring exceptions one of which is education where the NZEI has successfully resisted the introduction of performance pay for years. But it is accepted throughout most of the public sector and in most larger industries. I suspect that in small businesses application is more variable.

By and large, the accepted wisdom is that performance pay is a good thing – it rewards employees who perform particularly well and gives signals to other employees about the benefits of good performance and the risks involved with poor performance, particularly if it is persistent. However, I don’t think it is at all that simple and this article looks at when it should apply, when to be careful about the application and how all this sits with the education sector.

There are situations where performance pay works well. In industries where individuals are involved in selling a product and their success or not is clearly due to their individual efforts, performance pay- usually in the form of commissions – is an effective mechanism. The prime example is the real estate industry, but some forms of insurance fall into the same category. The practice of paying commissions also seems to be prevalent in some parts of the retail industry.

Conversely, Instances, where performance is due to the performance of a group of employees, is not well-suited to performance pay. The key problem is that if performance is poor then that may be due to deficiencies on the part of only some members of the group, but the whole group then gets penalised. The converse can apply. The group may contain one gifted individual who carries the rest of the group along. In cases like this, I think it is better to go down the route of paying a bonus or similar which is tied to the performance of the whole organisation, or which celebrates some importance organisational event or milestone so that deficiencies on the part of some employees do not affect the result.

Many cases lie in-between these two extremes. In many cases, the individual does have specific responsibilities (which may be formalised as a performance plan) but the person also functions as a part of a team, and the team performance can influence their performance. Performance pay can work in circumstances such as this but it can also be ineffective if not actually counterproductive. Particular problems are:

• The performance plan may be badly written or just plain wrong so that it is either impossible to implement or produces results which run counter to the interests of the organisation.
• It may be difficult or impossible to quantify performance expectations and achievement which means that judgement has to be applied. This opens a considerable “can of worms” as judgements can vary considerably from one person to another.
• Very commonly, those assessing performance even where there is a clear performance plan, do a poor job or just plain get it wrong. Experience indicates that if performance is going to be assessed it should be done regularly and sufficiently well so that the employee has an opportunity to take corrective action.  Once over lightly say once a year can be worse than nothing.
• Most managers are very bad at dealing with poor performance (it is something for which managers need to be trained and requires courage and a lot of careful effort) which can be very corrosive for the organisation and for those who have performed well and see those who have not performed well being equally or inappropriately rewarded.
• And finally, some people simply don’t respond to performance management – they do what they do because of their personal qualities and predilections, and performance pay becomes a distraction.

What can be drawn from this is that performance pay works best in commercial or semi-commercial situations where results can be measured in quantitative terms, down to the level of individuals. The more qualitative the nature of the organisation’s mandate and operations and the more that people operate as teams rather than as individuals, the more the difficulties discussed above arise.

There are alternatives to performance pay as a way of improving performance and the best known is mentoring which is a continuous process involving the provision of advice and suggestions to the “mentored” as they progress with their work. A lower key form of mentoring might be described as ongoing performance discussion between a manager and her/his staff. A key to mentoring, of course, is for the mentor to genuinely have the ability to mentor, ie to have greater knowledge and understanding than the person they are mentoring. That may not be easy to achieve.

Which brings us back to the thorny question of performance pay in education particularly at primary school level.

There are two sides to every story and no more than in education. There is no doubt that there are good (well performed) teachers and bad teachers. Good teachers can have a lasting, beneficial and sometimes transformational impact on their students and it makes absolute sense for the system to be able to recognise and reward that.

But the measurement of performance in education presents major problems. These are in part systemic, i.e. related to the nature and quality of the curriculum that teachers are required to teach, and in part to the enormous variability in the student population. No two students are alike – they may respond to different stimuli and teaching methods. And at the primary school, in particular, the starting points are so different – there is a vast gulf between children who have been effectively “tutored” by their parents, and those who have little or no preparation for school. A good part (but not the whole) of this difference can be traced to differences in socio-economic status.

In principle, an assessment system could be devised that adjusted for all these variables and was based on the principle that the role of the teacher is to “make a difference” – but differences in what and measured how? The traditional answer to the second question is some form of exam or test but that has difficulties as well because the ability of people to handle that kind of approach is also highly variable.

With some reluctance (I do believe better teachers should be identified and rewarded) I consider that performance pay in primary education particularly, falls into the “too hard” basket – so I guess to some degree I side with the NZEI, the teacher union. However, as already indicated I think the NZEI position is a too hard line. Education is too important for the best teachers not to be at least identified, given recognition (monetary or otherwise) and able to be used as role models for the profession. The previous National Government was moving in that direction bit there is unlikely to be much further progress under the present Coalition Government. However, the issue is too important for work not to continue toward a practical solution – and I think one that does involve monetary reward, but almost certainly not in the form of performance pay as we currently know it.

By Bas Walker

This is another of Bas Walker’s posts on GrownUps.  Please look out for his articles, containing his Beachside Ponderings.