Pay for Performance?

To most leaders, the concept of “pay for performance” seems logical. We think that financial rewards will naturally incentivize people to work harder. And the company should be a meritocracy, where the superstars are paid more than the slouches, right?
 
Unfortunately, pay-for-performance programs almost always cause harm in practice. I’m a little surprised that the majority of companies still use them.
 
When an employee hears an employer say “We pay for performance,” the employee thinks, Great! If I work twice as hard as the person at the next desk over, I should make twice as much.
 
But what the employer actually means is closer to: If you work twice as hard as the C-player at the next desk over, you’ll get a 5% raise at year-end, and they’ll get a 3% raise.
 
This unspoken misalignment creates all sorts of grief. Once you establish the idea in the employee’s head that their pay reflects the quality of their work in comparison to the work of their peers, you’ve created an expectation that…