How Effective Are Pay-for-Performance Programs?

Mar 13

Does your pay-for-performance program work? 80% of your colleagues say their pay-for-performance (PFP) experience is mixed, at best. So does Jeffrey Pfeffer, professor of organizational behavior and human resource management at Stanford. Professor Pfeffer testified to the House of Representives on March 8, 2007 about pay-for-performance and the possibility of implementing PFP in the U.S. Postal Service. He wasn’t advocating for pay differentiation. In fact, the opposite. He said:

In even individualistic setting such as baseball teams and university faculties, the evidence is that the greater the dispersion in individual pay, the lower the performance. In less individualistic settings with even higher levels of task-related interdependence, such as companies, the evidence is that greater pay dispersion is also associated with diminished quality and financial performance.

There is evidence that in sports that involve almost no interdependence, such as golf and automobile racing (where there is interdependence within the crew but not between crews), higher differentiation in the prizes awarded to winners compared to the others does spur greater levels of performance. However, in the automobile racing case, the evidence seems to suggest that speeds go up but so do accidents.

In short, individual pay-for-performance is premised on a set of assumptions which rest on very shaky logical and empirical foundations. It is, as a consequence, not surprising that such systems are fraught with problems, an issue to which I next turn.

Prof. Pfeffer’s entire testimony is well worth reading. He doesn’t use conjecture — he backs up what he says with academic and empirical research. I’m going to write more about this, but wanted you to have a chance to read the article and draw your own conclusions. I’m re-evaluating some of my thoughts about PFP…another edition of “strong opinions, loosely held.”

About the Author

Frank Roche

Frank started IFRACTAL over 7 years ago with Sarah Chambers. Together, they've created HR communications and HR software for some of the world's leading companies. Frank is also studying Flamenco guitar and origami.