An Argument for Unfair Pay

Laszlo Bock, SVP of people operations at Google, has a new book, Work Rules!, hitting the market this month. As to be expected, there’s been a good deal of news coverage, excerpts and blogs about it, including this one in Fortune with Mr. Bock’s “10 things to transform your team and your workplace.”

Today, I’d like to call your attention to two of these.

In seventh place on Mr. Bock’s list is “Pay unfairly” with this comment:

“Ninety percent or more of the value on your teams comes from the top 10%. As a result, your best people are worth far more than your average people. They might be worth 50% more than your average people or 50 times more, but they are absolutely worth more. Make sure they feel it. Even if you don’t have the financial resources to provide huge differences in pay, providing greater differences will mean something.”

To compensation pros, I’m sure this isn’t groundbreaking. I’ll ask my colleagues here in the Café to weigh in, but this seems to me the principle behind the idea of merit pay (at least as originally designed). I agree with this approach. Those who work harder and deliver more value deserve more pay. It’s the last line in the above quotation that gives me pause. We’ve all seen “merit pay” differentials erode in the last several years with top performers getting, perhaps, a 3% pay increase vs. average performers receiving a 2% increase. Considering this is barely above a cost-of-living increase, I wonder if the difference is enough to drive the desired impact.

So, yes, pay unfairly, but don’t rely on that as a sole differentiator to set apart exceptional effort. Additionally, help employees (at all levels of performance) see the greater value of what they do, which is Mr. Lazlo’s first tip: “Give your work meaning.”

“Work consumes at least one-third of your life and half your waking hours. It can and ought to be more than a means to an end. In too many environments, a job is just a paycheck. But as Wharton professor Adam Grant’s work demonstrated, even a small connection to the people who benefit from your work not only improves productivity but also makes people happier. And everyone wants his work to have purpose. Connect it to an idea or a value that transcends the day to day and that also honestly reflects what you are doing.”

Help people draw this connection. When people demonstrate desired behaviors in line with core values or strategic objectives, recognize them for it. Make this recognition quite explicit to help them connect the dots and see the deeper meaning. Better yet, offer differentiated recognition awards calibrated to various factors such as level of effort, contribution, and result achieved. This enables you to involve more people (hopefully, the vast majority of employees) in recognition activities while also ensuring those who go above-and-beyond are recognized as doing so.

Once again, it’s the combination of pay and recognition that drives the greatest reward for employees – of all abilities and levels.

What would be on your list of ways to transform your team or workplace?

As Globoforce’s Head of Strategic Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. He is the co-author of "The Power of Thanks" and his articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.

Comments

[Jacque Vilet]

Derek --- Here are a few suggestions for recognizing your top 10% valuable employees. If you can't give a big increase in salary due to financial constraints you can do the following:

1) Have a VP hold small group meetings with them and appreciation and also "tap" their ideas for improvement. SMALL INFORMAL meetings --- no surveys. Not one meeting for everyone --- break out the total number into small groups of 7-8 people. Keep it small, personal and very INFORMAL. Not HR but a VP

2) Let these employees shadow their VP for a day or two including any meetings with clients and top management

3) Let them know their contributions are valuable. Give them a project/problem and tell them it's an important one for the company. They will work their __ off to solve it. Let them have access to high level management to discuss progress and to get help in removing any organizational barriers that are keeping them from solving the problem.

I think this kind of recognition with this group is better than a letter of appreciation, a gift reward (dinner for two at a fancy restaurant), public recognition at an all employee meeting, etc.

This doesn't mean you don't give recognition to other employees who are high performers -- but you really need to differentiate and reward the really valuable employees with a different type of recognition.

Just my opinion.

[E. James (Jim) Brennan]

The original author's catchy phrase, "unfair pay," is an unfortunate but memorable one. I would prefer to substitute other terms to describe your otherwise valid points. Paying inequitably, differentiating appropriately and customizing your reward reinforcements for the variable contributions of unique individuals and recognizing exceptional performance... would all be nicer ways to achieve the same objectives with friendlier words. The Pareto Principle still applies.

Jacque correctly notes that any positive consequence involving direct empowerment granted from line management is a far more powerful reinforcement tool than anything available from HR. Unless the outstanding performer works for HR, of course!

Don't think Derek needs to comment about the fact that there are a million different forms of recognition, with more rediscovered or newly invented every day.

[E. K. Torkornoo]

Thanks for this piece. Yes, it is true that the importance of Employee Segmentation and Rewards Differentiation – in their many forms -- are not new to many rewards professionals. In fact, in HR (and rewards) decision-making, we often to discriminate / differentiate on the basis of solid grounds in terms of job- or performance-related data and considerations

I agree that the wording "Pay Unfairly" is unfortunate. Instead of risking the high potential of legal exposure of stating in writing that you have "unfair" pay in your own organization, it might be safer to speak of 'unequal rewards for unequal performance' or, more positively, 'really fabulous rewards for really fabulous performance' or something along those lines.

These days, I am saddened each time I hear / see mentions of 'merit pay' when there is a discussion on paying for performance. It has been extensively suggested (established?) that so-called 'merit pay' practices and matrices are really NOT about 'merit' but about sticking to budgets. Worse, merit pay systems do not discriminate and differentiate significantly between high performers and low performers. The common phenomenon of Merit Rating Compression (ostensibly to make things fit into the budget in relatively egalitarian cultures) is particularly annoying to high performers, and drives them away. In fact Merit Pay methodologies are anachronistic relative to rewarding performance. Many advocate scrapping them all together, even though there are, still, some sectors that would have difficulty without them.

It would be instructive if we obtained more verifiable evidence, on a case by case basis, on these suggestions of 80:20, 90:10 or whatever ratio it really is relative to productivity of high performers versus others. I am inclined to think that the ratio depends on many dimensions along which organizations vary, and requires care in definition and application.

Here is a random list on a part of the equation, since you asked:
Beyond attending as well to non-cash rewards that provide a balance of 'total rewards' aligned with your employee interests / values, we need to focus on the things that help high performers (individuals and teams) do their thing. Hire them well; resource and engage them well on projects (instead of making them sit around for too long in dysfunctional groups, or in scrappy work spaces and work environments, etc.); keep them away from terrible managers, narcissistic leaders and distracting politics (to the extent possible); assign them to teams with others they respect, listen carefully and respond to them (some of them hardly talk or talk in very 'different' ways); etc..... There is increasing body of work on what works for high performers.

Anytime you discriminate / differentiate in rewards, your need to very carefully manage rewards communications to avoid unintended consequences. After all, besides high performers, we do need 'the others' too.

Runaway Egalitarianism in rewards is a sure way of entrenching entitlement cultures, and killing initiative, creativity, innovation, and organizations.

... Just a starter of thoughts....

Thanks again.

[Ted Weinberger]

Pay unfairly? Perhaps not. If performance level is more a function of individual endowments (e.g., abilities, traits) than effort expenditure, and small differences in performanace level translate into large differences in economic return on employment, it makes sense for the employer to allocate pay in a highly skewed distribution.

Those of us who have been compensation practioners for many years were inculcated with the notion of performance levels across employees being distributed as a normal (bell shaped) curve. This notion was compatible with how businesses operated in the late 20th century -- company performance was dependent on the collective contributions of the mass of employees. However, in present day, it is the "superstar" employee that counts. The performance distribution really reflects a Paretial (power law) curve. I refer you to an article in Personnel Psychology 2012 on "The Best and the Rest: Revisting the Norm of Normality of Individual Differences" by O'Boyle and Aguinis for an academic discussion of this subject.

In any case, I generally agree with Bock's comment. As compensation practitioners, we will need to change our thinking to accommodate this new reality of delivering more polarized pay treatment that places emphasis on the top 10%. The traditional merit pay program -- with its more broadly distributed pay treatment -- is becoming a less relevant vehicle for this new era. Thanks.

[E. James (Jim) Brennan]

What works for high performers is frequently the same "secret sauce" that changes low performers into high ones, too. Everything we have discussed here was covered succinctly in the famous old Mager/Pipe Performance Problem Analysis model which is still overlooked more than applied, even today when we KNOW that it works.

Anyone who thinks a bell curve distribution fits a high performing organization should have THEIR bell rung. Loudly and repeatedly! Preaching to the choir, of course...

[Jules]

Paying fairly =/= paying equally.

Paying fairly means you acknowledge the contributions of your star peformers who went above and beyond hit stretch goals by giving h(im/er) more merit/bonus and not giving merit/bonus to the slackers.

The problem is, not many managers wants to have that tough conversation. Plus, with the US current merit budget, giving your star performers 1% more vs average performer will only motivate them so much.

[Tony Bergmann-Porter]

What Jules said.

The notion that you can provide meaningful performance differentiation with a 2-3% budget is fanciful, and attempting to do so is likely (in my experience, anyway) to produce more discord and disruption than benefit.

Besides, why would you want to annuitize last year's performance?