In part one I explored the views of human nature that often underly moves to link pay and performance, even now. I suggested that individual performance is the product of the system within which people work, and that to hold individuals to account for their performance in these complex systems of work is misguided at best. In this part I unpack what the consequences of such a move might be. 

The logical consequence of over-constraining a complex system is that it will (at some unknowable point) fail, probably quite spectacularly. How? If the only way we can get a pay rise is by demonstrably meeting objectives we’ll do a combination of things: (a) wrangle for readily attainable targets, (b) avoid doing any work that doesn’t in some way contribute to their achievement (ruling out collaboration), (c) game the system by cheating, subtly, to provide the evidence that you are meeting your targets, or (d) disengage from (and potentially attempt to subvert) the game, in all likelihood leading to, eventually (after being put on personal improvement plans), resignation or dismissal. 

If you have several hundred employees all taking a combination of strategies (a) to (e) above, you have a recipe for dysfunction and disaster. What might that look like in practice? 

1. The prisoners dilemma. Staff will fall into two camps – those who will do whatever it takes to meet their targets and thus get a pay increase, and those who refuse to play the game. Each group is in conflict with the other. Do you stick or twist?
2. The survival of the most individualistic. Those who play the game will act in ways that ensure they meet their targets and not what is either needed nor necessary, like a stampede for the lifeboats when the ship’s going down. 
3. The consciencious objectors. Those who refuse to play the game risk being outcast and having further HR processes brought to bear to ensure compliance. Solidarity is their driver. 
4. The beauty contest. Managers will use the process to court favour and reward favourites among their staff, seeding further division within and between teams and entrenching bias and discrimination within the business. 
5. The rise of division. The relationships between the winners and losers will become uneasy and, at worst, fractious. Corporately, every issue will start to become a divisive one, as staff get more vocal about other perceived unfairnesses. Everything becomes a potential issue. 
6. The end of collaboration. The focus on meeting individual targets predicates against work that doesn’t contribute to them; most collaboration will be ‘out of scope’ as it is perceived to be too complicated to set and monitor collective targets 
7. The loss of motivation. The added value and extra work everyone previously committed to will be crowded out in proportion to their intrinsic motivation falling. Ironically senior leaders will see this as a deliberate choice of subordination.  
8. The organisational double-down. The requirement to conform and ‘play the game’ will be made explicit and reinforced in future iterations of the performance model, particularly for managers and senior leaders, who will be expected to be visible and vocal advocates.
9. The productivity drop. Time spent on value work will fall as those who decide to play this game will spend a disproportionate part of their time doing so – collating evidence, reworking targets to ensure they are exceed-able, negotiating their work, etc 
10. The institutional myopia. As targets are hard enough to review for an annual scheme, the notion of long-term impact will not be important. The financial incentives reinforce a short-term perspective. 
11. The reputational risk. It will be harder to recruit staff and cultivate positive stakeholder relationships; staff will be morally challenged in delivering their client-facing work. 
12. The rise in staff turnover. The intrinsically-motivated that can do so will vote with their feet and leave, increasing the concentration of more individualistically-minded and extrinsically-motivated staff.  
13. The culture shift. Being a product of the behaviour of staff, the organisational culture will reflect the above shifts, becoming more competitive, individualistic, divisive and fractious; no number of posters on walls or invocations to embody particular values will cure this. 

A more hopeful reading is that the culture could become more solidaristic in opposition to this approach and the staff body, by sticking together, will be able to shift the direction of travel back towards a way of working that is based on a more hopeful view of human nature. This remains a conflictual route which will require a painful transition, railing as it will have to against attempts to impose a new order, which is an institutional equivalent of a battle for hearts and minds. It will take a big and, in all likelihood, painful effort, not just to resist change but then to move beyond that into a place where the wounds are tended and staff can actually collaborate again. 

At the end of the day, perhaps it is important to revisit first principles. What is it we are seeking to change through our performance-related pay scheme? The assumptions need to be surfaced. Do senior leaders think that staff performance is below where it needs to be? Have they diagnosed this as a result of poor motivation? Is this why their solution is to offer financial incentives? As I have outlined above, this is likely to result in the ‘fixes that fail’ systems thinking archetype. As we are dealing with a complex system (staff performance) there are not easy solutions to be found and implemented. Any attempts to constrain it will have unintended consequences. Often these are unknowable. Unfortunately, with regard to this issue, there is plenty of evidence as to what those consequences might be. 

What might we do instead? As Deming teaches, performance is a product of the system. Change performance? Change the system. This requires ongoing and deep engagement to learn about the system and work on the work. Simple fixes are lazy answers to difficult questions, enabling the blame to be shifted. That’s not an approach that will enable any organisation to meet the very real challenges in the world.