Pay For Poorformance

2016-05-26 08:59

The following transcript describes a court scene. (The reader will allow me a little literary licence. I’m am a-literally not a lawyer, so more Boston Legal, less Barrie Roux if I may)

A group of disgruntled ex-employees have brought a civil claim against XYZ Banking Corporation* for what they claim is systemic discrimination. Specifically, it is alleged that despite a formal remuneration policy of Pay-for-Performance at XYZ Bank, the actual process of determining pay and bonuses reflects significant non-performance, non-work related considerations as a result of unconscious bias and discrimination.

JUDGE: In the case of Class Action v. XYZ Bank, the defence may call their first witness.

DEF: Your Honour, the Defence calls Mrs Smith*; Head of Organisational Culture at XYZ Bank.

Mrs. Smith takes her seat. In a dark business suit, crisp white shirt, black hair firmly pinned back, Mrs. Smith’s elegant poise casts an attractive, if imposing outline. The Lawyer for the Plaintiff (LFP) is struck by her confident demeanour. He remembers some research he recently read about the correlation between first impressions, attractiveness and above average remuneration.

LFP: Good Morning Mrs. Smith. How are you today?

MS: I am fine, thank you.

LFP: Mrs Smith, could you please explain to the court what it is you do at XYZ Bank?

MS: Yes, of course. I am in charge of Organisational Culture.

LFP: Wow, that sounds like a big job. Can you tell me a little more…?

MS: Of course, over the last two years XYZ Bank has been in the process of redefining it’s corporate culture. We operate in 14 countries across Africa, with a Head Office in South Africa with several offshore operations in London, Isle of Man, places like that. We felt it was necessary to define a single, coherent culture across the Group. I am responsible for articulating and implementing this centralised culture across the organisation.

LFP: Do you have any direct banking experience?

MS: No I don’t, but I do not think it is necessary to have been a banker. I believe culture is universal. I have worked in HR and I am faculty member on the MBA programme at FIBS (Fictitious Institute of Business Science).

LFP: So Mrs Smith if I were to ask you to describe the new culture at XYZ Bank in one sentence, what would you say?

MS: I would say that at XYZ Bank, we are an ‘Unapologetically Pay-for-Performance Culture’.

LFP: Pay-for-Performance?

MS: Yes, that is the one non-negotiable if you want to work at XYZ Bank.

LFP: And Mrs Smith, as a professional and an academic, do you believe that is what happens at XYZ Bank?

MS: Yes I do. Without a doubt.

Clearly Mrs. Smith had come to defend her employer. After a long pause…

JUDGE: Counsel, do you have any further questions for the witness?

More awkward silence…and then

LFP: Mrs Smith. Do women get paid the same as men at XYZ Bank?

MS: Uh, like any organisation, we are still trying to address a few legacy issues. Gender inequality in remuneration is one of them.

LFP: One of them? Interesting, care to tell us more?

MS: Well, one criticism of the bank is the wide salary ranges for each grade.

LFP: Ah. So you mean people can be doing the same job and get paid vastly different salaries?

MS: Yes, but I believe this is a feature of many other organisations. At times we have to poach employees from our competitors. This often means we have to pay up.

LFP: I see. So women get less, loyal employees who have been with XYZ for a long time often get less. Are you sure what you are describing is a Pay-for-Performance Culture?

MS: We are subject to market forces. The supply and demand for skills often dictates what we have to pay people when they come in. We negotiate the level of salary with each employee before they sign their contracts.

LFP: But Mrs Smith, that is not the argument. Your argument is that you are a non-negotiable pay—for-performance culture. Yet you have just said you negotiate with employees before they start?

MS: Well I suppose we pay for people’s skills, experience, level of education….

LFP: Ah, so we extrapolate their self-reported achievements in their CV. Science usually heavily discounts self-reporting as unreliable.

MS: Our salary ranges may vary, but the annual bonus is the great equaliser. Bonuses more accurately reflect performance.

LFP: Perhaps we need to define performance. How is that judged?

MS: Managers spend weeks preparing budgets. Individuals are then assessed against these budgets, well mostly, a few soft issues are considered too.

LFP: Let me guess, once these meticulously prepared budgets are presented upstairs, the senior managers add, oh I don’t know, an extra 15% to the sales and market share numbers?

MS: Yes, it’s meant to be a stretch target.

LFP: But that’s more hubris than analysis isn’t it? Tell me, in your experience, how often do teams actually make budget?

MS: Hardly ever. In exceptional years they might. When the economy is doing well.

LFP: How often do people get paid a bonus?

MS: Every year.

LFP: So in your professional opinion, do these thumb-suck stretch targets serve any purpose? They don’t exactly motivate people, they are aren’t being used to measure pay for performance. You see research shows that when people prepare budgets that are simply arbitrarily revised upwards by a senior manager, they have the opposite effect. They discourage people. When people feel they have no control over a potential outcome, they tend to feel helpless. Seligman calls this Learned Helplessness.

MS: We can’t have people aiming low.

LFP: I agree Mrs Smith, but why waste everyone’s time preparing meticulous budgets. Surely it would be a better use of company resources to just start with the manager’s big swinging target, rather than several weeks of PowerPoint presentations? I digress, tell me Mrs Smith, when the bonus provisions are sent upstairs, do managers weigh in on bonus allocations; even though they do not work directly with the employees concerned?

MS: Yes, they do.

LFP: I’m curious, Mrs Smith. How is this Pay-for-Performance?

MS: Well local managers tend to be, shall we say, overly-generous. We can’t always trust their numbers. We need a systematic way to arrive at a base number, and then temper people’s expectations.

LFP: A systematic way?

MS: People get paid based on their annual Individual Performance Appraisal.

LFP: And Individual Performance Appraisals take up huge amounts of time and resources?

MS: Yes, we must be thorough.

LFP: And you believe Individual Performance Appraisals are worth the cost to the firm? The marginal benefit of IPAs are greater than the cost? Even in the largely collective cultures in which you operate?

MS: Well, I think they are fair.

LFP: Ah, fairness is essentially at the heart of this matter. Do bonuses reflect a percentage of their annual package?

MS: Usually, yes.

LFP: But you have already stated that people, women for instance, earn less than men. So in absolute terms, a percentage of annual will be less for no reason related to performance! What other reason can you think of?

MS: I really don’t understand what you have against Pay-For-Performance.

LFP: On the contrary Mrs Smith. I myself come from an Individualistic, Task-Oriented cultural background. I honestly believe that Pay-for-Performance is fair and equitable. I also know that research shows unequivocally that Pay-for-Performance in Collectivistic, Relational-Oriented cultures does not result in greater productivity, in fact quite the opposite. It is culturally inappropriate and has been proven so many times.

MS: But we live in an individualistic, task-oriented business world.

LFP: In Africa?

MS: Well, we reward achievement in Africa.

LFP: Yes, we do. But also place a great deal of emphasis on the position a person holds in society. Status is both achieved and ascribed. Much like Asia, Latin America; success and remuneration is based not just on a person’s individual achievement, but also on how they contribute to their community; and their position in society. Furthermore, recent research clearly shows that the manner in which bonus pools are divided in East Asia for instance, more closely reflect social hierarchy, not individual contribution. Why do you think your way is better?

MS: Well the Western approach clearly has the track record. Individualism is the core of capitalism. We can’t all become socialists.

LFP: I agree. But do you think companies like Samsung, Sony and Hyundai operate in individualistic cultures? Would you describe China as individualistic or collective? What would you do if I told you that all the research into Pay-for-Performance remuneration policies in collective cultures such as Southern European, Asia, Africa and Latin America show such a remuneration approach actually lowers productivity? In other words, it costs the company more money for less output! (Trompenaars 1993; Hamden-Turner 1991; Hofstede et. al 2012; and many others.)

MS: I would say we need to transform the way in which we do our business.

LFP: Transform. Or Assimilate? I think the quintessential cultural challenge facing a modern multinational organisation like XYZ Bank is the issue of Centralisation vs. Decentralisation. I think you have taken a Western-centric management philosophy, an approach that intuitively sits well with the cultural heritage of the home head office leadership, and simply instructed everyone across a diverse geography and demographic to assimilate into that culture. That’s not transformation, that’s assimilation. Do you not see parallels between this approach and the recent trouble witnessed on university campuses?

MS: I disagree. People must learn to assimilate into modern business culture.

LFP: Yes, but then call it that. Don’t call it transformation, when you yourself are not prepared to transform. If I may, let me ask you another question. When you hire someone, do you tend to hire people just like you?

MS: We have diversity targets, regulatory requirements in terms of staff demographics.

LFP: Yes, but even so. Even across diverse ethnic backgrounds, do you think a pattern of similar schools, universities, the manner in which people speak and dress might influence an interviewer?

MS: Yes. I suppose as people we are more comfortable with people that are similar to us.

LFP: Yes, in psychology they refer to this as 'The Similar-to-Me Effect'. So if a person is say, a cyclist or a triathlete, that might increase their chances in an interview?

MS: Yes, it probably would. We have a culture of sport and fitness at XYZ Bank.

LFP: So if one is not sporting inclined, they might feel a little left out?

MS: As we like to say, people need to fit in or f-off.

LFP: At FIBS, one would expect the word ‘Science’ might imply the application of evidence. That would be real management science; like for example an actual evidence-based remuneration policy rather than a business school hypothesis?

MS: Yes it would.

LFP: Your Honour. I have no further questions.

* Names have been changed because this story has obviously been made up!

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