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Is the core assumption of pay-for-performance, that we can isolate the contribution of individuals on outcomes, correct? Here are five challenges that need to be met, and met well, before pay-based reward and punishment should even be considered.

Is the core assumption of pay-for-performance, that we can isolate the contribution of individuals on outcomes, correct? Linda Gorman, in her essay on What’s Wrong with Pay for Performance? in the medical and education sectors, writes a compellingly and soundly evidenced argument that should have pay-for-performance advocates dropping it like a hot coal.

From Linda’s essay, I summarised five specific challenges that can’t be ignored in any pay-for-performance scheme – no matter the sector or industry.

Challenge #1: Isolating individual contribution when variation is always going to be present.

Because all things vary, our performance measures will exhibit variation. That’s normal. But if we don’t appreciate that variation, we’ll risk making decisions about a good project manager at a time when the project performance measures are at a natural sway away from target. Likewise, we’ll risk making decisions about a poor project manager at a time when the project performance measures are at a natural sway toward targeted performance.

Challenge #2: Isolating individual contribution when the effect unfolds over time.

Not all impact is immediate. A careers counsellor may instil some great advice in unemployed graduates that won’t take effect until many years after the counsellor has lost contact with those graduates.

Challenge #3: Isolating individual contribution when the system of cause-effect is complex.

More often than we realise, what we assume is people’s impact on an outcome is actually the impact of the processes or systems that people have to work in. Policies, procedures, available resources, management direction, actions of other stakeholders, social forces,… these are just some of the things that can have the biggest contribution to an outcome, irrespective of who the people are that are doing the work.

Challenge #4: Isolating individual contribution without testing the size of and sensitivity of impact.

We “performance manage” people to improve their performance. We give them training, we coach them, we incentivise them. But because of challenge #3, when other factors have dominent effects on an outcome, all this effort to improve people’s performance can have but a tiny and inconsequential (or no discernable) effect on the outcome.

Challenge #5: Isolating individual contribution when the effect comes from interactions, not individuals.

Systems thinking is the study of the interconnections between and among things. It’s the opposite of reductionism. And at least in my experience, it’s a truer description of how the world works. In reducing an outcome to a linear sum of individual people’s contributions, we ignore the fact that much of reason for that outcome being achieved is due to the way those people worked together to make the outcome possible.

This fifth challenge, for me, is probably the most difficult of all to overcome before pay-for-performance can become anything more than a nail in the coffin of true organisational performance excellence.

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I’d love to make this a discussion. What are your thoughts about pay-for-performance, about these challenges, other challenges, and how they might be met? Share your comments on this blog, below.