Totally Rewarding Chats | Ep. 37: What Pay Costs - The Science of Pay

[00:00:00] All right, we are with Totally Rewarding Chats. Back to the home versions as we go. How's it going, Mr. Reimann? All good. We're back to different backgrounds. It's been weeks since we've seen each other. Well, this is the same background I have. I don't know if you haven't noticed. It has been weeks. And I'm glad to see actually that you really weren't feeling, you know, your family wasn't feeling well when we were at World of Work and you just hadn't enough of me in a small period of time.

[00:00:26] It was a legit excuse and I am back to not wearing the bow tie. So those of you on video, you can see I am not dressed as smart Paul today. I'm back to back to normal Paul. The only bummer, I said the only disappointment I had with all the World of Work and it's my own fault. And we'll introduce James in a second here. We made Paul had to leave and go home early for family and we made a mini Lego Paul in his honor for the booth.

[00:00:51] But we left mini Lego Paul in San Antonio, which is very sad because I really, in retrospect, wanted a mini Lego Paul here for every session. I might have to make a mini Lego Paul. Like I'm kind of feeling like my mini me has been abandoned. Yeah, he looked really small next to Brian. Thanks for being here, James. How are you?

[00:01:13] First, I'm doing well, thanks. First of all, you know, Paul's bow tie. I don't think I've ever actually spoken to you while you're wearing it, even though I feel like it's your trademark and I've seen it in pictures. I don't think I've ever met you or spoken to you while you've been wearing your bow tie. You might be right because I think we had our conversation in San Antonio on Sunday evening and I was not in sort of speaker mode Sunday evening, whereas I was bow tied up Monday and Tuesday. But I don't think we ran into each other then.

[00:01:40] I don't think so either. No, I think I think we bumped into one another in the expo hall. So I've only got your word to take for this at this point. It could be AI. It could be an AI tie. Is that your superpower? You need to tie to present. That's the it. Yeah, it's a it's a bad story, honestly. But like when I was an intern 28 years ago, I didn't I had massive imposter syndrome and my grandfather told me to dress the part like that was this thing.

[00:02:07] So I wore a tie every day to work as an intern, even though nobody else did. But I found it helped. Like I felt more engaged psychologically as being like grown up Paul. And it just stuck like I'm going to put the tie on when I speak. So it's sort of a thing now when I'm when I'm speaking, I put the bow tie on. But and I call it smart Paul because it makes me feel smarter. It makes me feel like ready to engage. So it's really, James, you just haven't you've never engaged with smart Paul. Like you get done all the time. That's something I'm going to go into.

[00:02:38] Yeah. Yeah. So for the rest of this episode, by the way, if you don't like what Paul says, one of the things you can do is be like, bro, go get it. Go put the tie on. Yeah, that's the that's the code word for that was terrible. Go get the tie. There's probably a whole episode because I think I've told you my story, Paul, where I had the opposite, where I someone had made me dress up. Right. And literally afterwards told me that was the worst presentation they'd ever seen in their entire life. Like literally bar none.

[00:03:07] And it was because I was in this trying to be what I wasn't thing. And so how you how you get your head around. And I know, James, you were on the, you know, the main stage at World of Work. Like what you wear. Like there is a lot actually that I don't think people think psychologically. They're not huge. Totally. Like what makes it tick for you is that's like a whole nother episode of stuff. Yeah. You know, I changed the last minute. I was I was I was going to wear a shirt and I just I got go ready.

[00:03:37] And I just it just didn't feel like me. My wearing a shirt. I just don't wear shirts much anymore. I felt like it felt like the old me. For the Americans, was your was your other option? You were going to go up there shirtless. That was one option. Admittedly, the odds were pretty low, but technically it was an option. Now, in the end, I decided to just go for a T-shirt with a with a with a sport jacket over the top. Was that that felt like somewhat something between the formality and the and the non-formality. But it's a different vibe at World at Work when you show up literally shirtless.

[00:04:07] I was going to say I had some commentary about my time on the main stage. But that would have been dwarfed by James rolling up there with no shirt. So I'm totally down if you want to do that next year. So obviously you were there. Can you give us your your background, James, and what you're doing now? And and and then we'll kind of jump into the speed round and then dive in. But it'd be great to get your kind of bio without either one of us screwing it up.

[00:04:39] Yeah. So, well, my I started off as an accountant. So that was really my my first profession. So I became an accountant. I qualified as an accountant. And that was really I'll come back to that. That was really the first seeding of this idea that kind of stuck with me my whole career, which I now write and talk about. But then I went from consulting back to sorry, accounting back to consulting because I'd previously done a temporary gig at Hewitt Associates before that was part of me on Hewitt.

[00:05:07] So I went back into consulting because I liked the openness of the problems that you had to solve that with accounting is very predefined, very process driven, very safe, very cautious, very controlling. But consulting felt a bit more interesting and you could figure things out. You get given a problem. You have to figure out the solution. So I went into consulting and for a long time I was doing what most consultants do, which is, OK, you want performance that design a bonus plan. You want sales results that design sales incentives.

[00:05:36] And a few years ago when I went independent, I just decided to question all of that because I just got this impression that these this incentive driven do this and will give you that model of management wasn't really helping anyone. Despite how wonderful my solutions were, despite how perfect those Excel files were, it just wasn't working.

[00:05:57] So I started just going down this research rabbit hole a couple of years ago, which led me to write this book, What Pay Costs, which was essentially what does the research say? What does the evidence say? So and when you look into it, you start to realize that there's a whole lot of bad that comes with incentives. So incentives in the purest form, yes, you can get someone to do something very simple for a short amount of time, but it kills intrinsic motivation. It reduces problem solving capabilities.

[00:06:24] It can't be used to drive collaboration. It can't be used to drive innovation. All the things that people say they want their company to do using financial incentives doesn't really do that. So now my thinking is much more around, well, then if that doesn't work, what do you do to get the most out of people? And it really comes down to trust and recognizing that people aren't lazy and that they will do good work if you let them.

[00:06:51] And that what you really need to do as an employer is create the conditions for those people to generate the ideas that are ultimately the lifeblood of your own survival. And you can only get by by selling more of what you've got for so long before someone comes along and out-innovates you and does what you do better and for less money. So my thesis now is that we need to stop trying to default to these systems of control and measurement and surveillance and metrics and quarterly and weekly and daily goals.

[00:07:16] And we need to think more about, well, let's assume people want to do good work and let's let them do it and give them broader guardrails for how to achieve that and measure that success. So that's been my journey. So I was a believer in pay for performance at one point and I've since come to just decide that it doesn't work. There's no evidence anywhere to say it does work. It's just marketing in my view. So that's pretty good advice. But accounting was my first taste of that.

[00:07:43] Accounting is very measurement, very sort of goal-based, very hourly-based. And so I got to be on the receiving end of that for the start of my career. And I saw that it didn't bring out the best of me. And I was kind of looking at myself and thinking, why can't I figure these things out? And then I started sort of doing the research and you realize, well, that's because there's terrible conditions for human innovation. So that was the beginning of that journey in a way. Let's do the human check. I can't wait to argue about this because this will be a fun episode.

[00:08:10] But I think let's start with – let's just make sure everybody knows James is a human and then I can't wait to dig in. I'm a human. Because I'm in the middle, which is kind of weird. Normally I'm one of the polarizing ends, but I'm going to be, I think, somewhere in the middle. Are you a coffee or tea person, James? Oh, I'm both. Like I'm drinking coffee right now. I'm a big coffee person. So in my hand I have – this is my go-to daily roast. It's a sort of medium dark. It's called the San Francisco – no, the Bay Area Fog Chaser.

[00:08:39] I can't think it's the Bay Fog Chaser maybe or the San Francisco Fog Chaser. A great daily coffee. You've answered the follow-up question already. So typically we ask them, are you a coffee snob? Yeah. And that's okay, by the way. That's a compliment. Like I am definitely that too. Yeah. I've been worse in my life than I am now. Now I'm much more – like I did have a lot of paraphernalia at one point. And I was just talking with Dart Lindsley, who's also a coffee snob, and Luke O'Marni, who's also a coffee snob as well.

[00:09:07] And they do the whole AeroPress thing, and they've got hand grinders, and they really take it to a different level. So they are true coffee snobs. I'm a medium snob. In case we get past tens or hundreds of listeners, paraphernalia means coffee paraphernalia, just to make sure. Right. So the place in the world you haven't been that you want to still go to? Antarctica. Ah, that's a good one.

[00:09:37] Yeah. Yeah. I'm super confident about that, but sure. Well, you know, I've gone to a lot of places with a lot of people. I want to go to a place without a lot of people now. So Antarctica seems like the appropriate destination. More penguins, fewer people. Okay. Dress more, man. I like that. That's actually, that'll be the one takeaway from the entire thing. More penguins, less people. Right. Really important question. Very divisive, James. You have a weekend away. Well, how do you phrase it, Paul? You have a weekend away solo.

[00:10:07] Right. Assume that your partner is off having fun with their friends. So no guilt. Assume your animals are well cared for. This is all about sort of James can do what James wants to do. Yeah. Okay. Do you want a posh weekend away or would you rather go rough it in the woods? I probably, I'm a London boy. I would probably go posh. Like I can take a certain amount of camping, but if I'm truly treating myself to a weekend

[00:10:35] on my own, it would be, if I could do anything, it'd be like Tokyo for a weekend. That would be my, my, my, my. Okay. So jazz and whiskey. I like how you put the phrase in though. I could, if you made me. Which really. And people have made me. You're like, I don't want to really make Sean feel too bad. I could, but I don't want to. And I'm not a complainer. You know, I'll do it. And I'll put up with the walking and carrying things around inexplicably, even though you've got all this stuff at home, but I'll still do it. And I'll still enjoy it. We're going to move on from this, James.

[00:11:06] The best place in UK outside of London that you would send people to go to vacation. Oh, that's a good question. That's a good question. I would probably say the Lake District or the Peak District, like the, the, the, the true British countryside. I think the British countryside is phenomenal, massively underrated. The Brits know it's great. If the weather plays ball, it's sensational. But I, probably the Peak Districts.

[00:11:35] If you want a sense of what, what England is really like, I think what the, what the best of England can be, then it's, it's those places. Okay. I'll put, I'll go. I, I usually tell people Lake is my second or third. I'm a more Southwest, Southwest coast pass and the surfing is better. The surfing is better. But I'm slightly. I used to family holidays in Cornwall. So yeah. Yeah. Yeah. Yeah. That area. Crunchy or creamy peanut butter person. Oh, crunchy.

[00:12:05] Yeah. Quick response too. Like I like that. Yeah. I mean, it's easy. Like, I want to, I want to taste the peanuts. Like, I don't want to pretend that it's, that it's not got peanuts. There's peanut flavor. I want, I want, I want peanuts in my peanut butter. So when the faster the answer comes, Paul, do you notice the more defensive they are about their answer? There is a little bit like why you're wrong, Sean, that you like creamy. Like, you know, that doesn't even taste like a peanut. I don't know. How do you even convince yourself, Sean, that it was a peanut to begin with? Exactly. Okay.

[00:12:33] It could be, it could be AI at that point. Oh, an AI peanut. So let's dive in. So we heard kind of the overview of the book and I wasn't able to make your, was your session aligned to that? And then let's really dig into the, you know, does pay for performance really work? So, but was your session around that same topic? More or less. Yeah. I, I, I switched it slightly and included some new and different research.

[00:13:02] I probably went a bit research heavy in truth. I love research, so I don't mind it, but I need to appreciate that the audience doesn't always want to hear more and more research studies. But yeah, I try, I tried to sort of create a summarized version of the, the story arc of the, of the book for that, um, for that session. Okay. So, so let me, let me just clarify, I think a perspective of things. So does pay for performance work? How would you answer the question, work for what? Like, what's the goal that you think pay for performance is solving?

[00:13:31] And as a result, the position is it doesn't work. But I think there's a, there's a supposition about what is the work? Like, what is it trying to accomplish? I think that might frame the conversation a little bit and why I might have a different view on what, what are we trying to do with it? And that might form the basis for our disagreement professionally on the topic. Well, we don't disagree much, Paul. So if we have a little disagreement, I'm sure we'll get over it. We'll still be friends. They won't. Um, so the, first of all, like I always say, like, what do you mean by performance?

[00:13:57] So when, when we talk about pay for performance, um, and the origins of where all this came from, it really does come from exact comp and then in turn the sales world. But it's always been about a metric and about the volume of a given metric. But when I think about performance, what companies really need. So since, since 1955, 88% of the companies in the S&P 500 don't exist anymore.

[00:14:22] And the lifespan of the average S&P 500 company has dropped from over 60 years, um, in about the mid-century to less than 15 years now. So many companies think they're performing until they don't. And there's so many examples like Nokia and BlackBerry and Kodak and then General Electric and all the, all the American automakers, but the Japanese companies came along and did their, their products, but better and cheaper.

[00:14:49] There's so many examples of industries that were doing the volume bit, right. But weren't protecting themselves from irrelevance. So to me, performance is insurance against irrelevance. That's true performance. And if you really want performance, then you need innovation. And innovation is the thing that keeps companies alive. So when you, when we talk about pay for performance, I think we're normally talking about one person and their performance and individualizing their pay outcome to calibrate with that.

[00:15:17] And it normally comes back to merit cycles and bonuses, always, but generally speaking, that's the, it's the idea. Now, when we talk about what financial incentives can do, and you actually read the literature, there is tons and mountains of evidence. And then there's, there is multiple meta studies on all that evidence again, to sell, to tell you what it can and can't do. What financial incentives can do is give you a bit more volume for a short amount of time on something that someone knows how to do already. That's pretty much it.

[00:15:46] What incentives reliably do is hold back innovation, very reliably. So going back to the mid-60s. Sorry, one second. It was clear my nose. Sorry, I had a bit of a cold. No, it's just lingering. Yeah. If we go back to the mid-60s, Sam Glucksberg conducted his experiment to show that if you give people a problem that requires any cognitive resources and add an incentive in exchange for solving that problem, they will solve that slower, 50% more slowly than the people without an incentive.

[00:16:16] And that got repeated by Morten Deutsch. It got repeated by Teresa Amabile. It got repeated much, much later by Dan Ariely, who did the same experiment with higher stakes and with different rare tasks. We know that if you dangle an incentive, you narrow people's thinking. So if you want innovation, incentives are the worst possible way to do them. We also know that it creates second and third order effects that no one anticipates. So I always refer back to the cobra problem. And this is what I used at the beginning of my presentation.

[00:16:45] So in colonial India, the British officials said, we don't like how many cobras there are. We're going to pay local people to catch these cobras for us. So they did. And they got lots and lots of cobras. And they noticed the cobra population wasn't going down. And then they investigated and they found that locals were just breeding cobras. And they're like, OK, well, we're going to stop paying you. And then the cobras went, fine, we're going to release all our snakes. So the cobra population doubled or went out exponentially because all these cobras came out. And the same thing happens in the working world all the time.

[00:17:14] People contort their behaviors to chase whatever this metric is that people have defined. And you get these weird effects. So Wells Fargo is probably the best example in corporate America of a company that laid out all these incentives and completely reversed their goal achievement. They technically got new accounts, but then they faced a massive lawsuit and impediments to their growth by the Federal Reserve for the next decade or so. So when you look at the history of incentives and you look at the data and look at the case studies, they just don't work very well.

[00:17:43] There is a small group of roles that you can use it for. But even for those small group of roles, when we normally think about sales roles, there is an opportunity cost to getting people focused on achievement of short-term goals. So do they work? Yes. Pay performance does work. If you say, I will give you money in exchange to do something, then you're more likely to get that person to do that thing. But it only works if they know in advance what that is.

[00:18:09] And it comes with a whole load of costs that I don't think organizations can afford to ignore. Yeah. So I think what I'm hearing from you is that the work that Pay for Performance isn't doing is around motivation and innovation. I think I'm oversimplifying your thesis, but that's a lot of it, right? And I don't disagree with you that there's substantial research on – it decreases – motivation, the effect is maybe even the opposite, right?

[00:18:38] Like you can get a task and it works for piece, right? It doesn't necessarily work in more complex tasks. And innovation, I actually – I would say collaboration too. Like I would add to that, Paul, because if I can only do five of these things and there's two people in the company that can chase those things, then they don't collaborate to figure out and innovate how to find seven or eight or ten of those. They fight over those five. They don't collaborate.

[00:19:03] Or I try to figure out how I can go find a sixth one on my own instead of finding seven or eight because that's how I get paid. So the collaboration piece is probably the part – I think that's true too. On the summaries, James, that I find the biggest issue. Yeah, it hurts collaboration. Again, that's been proven in studies as well. I think – now here's the flip side.

[00:19:25] And here's where I think the research argues a slightly different perspective, which is if you take it away from motivation theory and you think of it more from a social justice equity theory, from a psychological contract – I think it's another term that the literature will use, right? I want to feel like what I get is commensurate with what I give, right? And that's a known effect and they've quantified that in the workplace. And pay for performance plays a role in that, right? So if you're solving for motivation, let's be careful about the word incentive.

[00:19:54] And does it really change my willingness to work harder? No, I'd be the first to admit most people are going to work to what they're going to work. But I do think in the workplace in particular where it's already an economic contract, we're not all just holding hands and singing kumbaya. Like I took this job for a reason. It's an economic contract. And as a result, with that psychological framing, there is an important role in knowing that the inputs match the outputs.

[00:20:19] So it's more of a fairness and a justice perspective than a motivation perspective is where I think there's more validity still in pay for performance used the right way. And with that framing, it's not I'm going to drive James to sell more by having this thing. It's more James wants to know that if he sells more than Sean, you're not getting the same thing. Yeah. And that was cemented in my head because I worked with a printing company years ago that did not do commissions. I thought it was like extraordinarily bizarre.

[00:20:50] You know, and they were successful commercially, but sellers would be like, yeah, but it's not fair. Right. And I think fairness as a perspective is an increasingly important thing in a more transparent world with a more diverse workforce that cares about different things. So that's sort of my thought. Like, I think we are we solving for the same problem when we talk about this pay for performance work? Fairness versus motivation aren't the same problem at the end of the day. But the problem is that it hasn't worked for that either.

[00:21:15] So 23 percent of people think they have a fair impact on their individual pay outcomes, according to Gallup. So we've been doing this for years and it hasn't worked. So, yes, if you could do it, then you would do it. If you could create individual. The assumption comes down to fairness being about the individual. The unit of work is not at the individual level for most companies. The unit of work is a team. And the problem is when we try to break the unit of work with the unit of reward, then people don't feel a sense of fairness.

[00:21:42] So there's a whole bunch of things in here that we can get into, which are really interesting because I agree in principle. But this is also a coached state of mind, particularly in North America. We are coached very early on that our individual output should contribute to our individual returns. So we get individual grades in school. We compete for places individually at university. We compete for jobs as individual. Then we get told we have to compete for merit budget. We have to compete for bonus dollars. We have to compete for the equity pool. This is a coached state of mind, especially in the sales environment.

[00:22:11] There is a condition that we have created that people expect to be individually rewarded for their output. But that's not the default human condition. And we can see that because the rest of the world doesn't really think this way. In much of the rest of the world, people think more collectively about the reward. If we're all working towards this together, then the shared reward is what is fair. It's not what you all get as an individual. So that state of mind, that assumption that I need to be paid fairly based on what I do, I would say is a coached state of mind.

[00:22:40] But there's a bigger problem here, that even if you don't agree that it's a coached state of mind, or if you agree that it's a coached state of mind and you say, but that doesn't matter, we still need to deliver on that, you can't. So again, the research shows that people don't believe they're paid fairly. And the research shows as well that we are terrible judges of human capability. So you've got a various number of problems. So first of all, my favorite one is idiosyncratic rater bias. So when you do a performance rating, say the three of us are doing it, and Paul, you've got your own assessment of your performance,

[00:23:09] and Sean and I have to assess you on, I don't know, executive impact. One of those silly phrases that for some reason finds its way into actual judgment. Then when we all rate you on that thing, the thing that drives your rating is far more likely to be driven by our perception of what executive impact constitutes than your ability to actually have executive impact. So the divergence of possible ratings is impacted far more by the observer than the observee. So that's one problem.

[00:23:38] So when you see a rating, you're learning much more about the person who did the rating, statistically, than you are about the person being rated. That's called idiosyncratic rater bias. Then you've got the fundamental justification error. So the experiment for here is that you take two people and you say, okay, let's do a quiz. So let's say, Sean, your specialist subject is camping. And Paul, your specialist subject is the bass guitar. Now, Paul, if you ask Sean any questions on the bass guitar, he's probably not going to know the answers very well. And in the results of the experiment, four out of ten was a typical result.

[00:24:08] And Sean, if you ask questions on Paul about camping, I'm going to assume, Paul, you don't camp, but you might do. Let's assume you don't camp. You're not going to have the answers to Sean's questions, and he might get four out of ten as well. But the interesting thing is both the recipient of the questions and the quizzer and an independent audience will rate the intelligence of the respondent lower than the intelligence of the person asking the questions, even though we know that the person asking the questions has the knowledge to begin with. We form an opinion based on their ability to respond to those questions, even though context is the massive thing that's driving it.

[00:24:37] And we do the same thing every time in a performance cycle. Context is what drives people's ability. We want to assume it's the person's character that's, oh, yeah, they're not a good performer. They're a bad hire, or they're not a hard worker, or they're lazy, or they're not a good fit. They don't get it and things like that. But the far more likely explanation is either one of these things. It's either that, well, actually, our assessment is wrong. We're not seeing their work every day, and we certainly can't see into the minds of the people that we're assessing. Secondly, the conditions around them

[00:25:06] are probably what's driving their success or their failure, their ability to learn, the people they're learning with. And there's a third thing as well, and I'm going to add to this, which is that it's a self-fulfilling prophecy. So we know now from research that if you assign someone as a high performer or a low performer, then they will live that assignment. And they did this first with animals, and then they did it in schools, and they took a group of school children, ethically a bit questionable these days, by the way. I'm not sure they'll repeat it, but they took a group of school children here in San Francisco, and they said, okay,

[00:25:36] we've tested you all, and this group of people is a high performers teacher, and same teacher, this group of your students are the low performers. And then they actually test, they just use an IQ test, they framed it as a clever test, but it was just a smoke and mirrors. And the group that was assigned high performance randomly performed higher than the group that was assigned low performance randomly. And once again, with performance ratings, we're doing exactly the same thing. We take all that flawed assessment, give someone a four or a five, because they're a four or a five, they're more likely to succeed. See, they're a high performer. We got it right,

[00:26:06] and we assessed it in the first place. No, you've just created a high performer with all the conditions that you put around that person. So all that said, if we still want to get down to the individual, even though I don't believe that's the right way to perform measure and reward, if we still want to, we can't. According to all the data, it's a very, very difficult thing to do. The only thing I'd challenge is, I don't think the data supports that it's like a uniquely American phenomenon of individualism. And my logic is, some of the most collectivist countries in the world

[00:26:35] is where, according to ADP data, the highest percentage of workers think they're not paid fairly for the work they do. So I do think there's evidence from, you know, 45% of South Koreans indicate, for example, that they're not paid fairly. Like, that's a pretty collectivist market. So I do think there's something more, there's something more fundamental in the human condition where people don't see equity or fairness necessarily connected to individualism or collectivist. I think there's something going on there that's worth unpacking. My biggest thing on that is always,

[00:27:05] I don't think anyone's people strategy is to hire dumbasses, right? And that's generally- That would be unique. That would be unique, right? Now the execution sometimes, you know- It'd be worth a try though. Imagine that as an experiment. That would be a great study. We're going to hire the worst people possible and see how it impacts our results. Well, and then see if they are, and you make them a four and the good performers- Yeah, see what you can do. The reason I say that is

[00:27:32] it doesn't take people long to understand in a pay-for-performance culture, there's a limited budget and that depending where you are, right? For me, it's the collaboration and the trust thing. Like, you can't measure. So your ability to get a bigger increase is not only based on how much I can be better than Paul or try to do better. So the way that I can be better from Paul is by two ways.

[00:28:00] So one, I just try to perform better, which is what the company assumes I'm trying to do, right? The second part is I will not freaking help Paul because I need Paul to fail for multiple reasons. Forced rating scales are my least favorite thing on the planet, right? Because in general, you're like, I have to make sure, like, I perform better than one of you two. The easiest way to make sure I do that is not help either of you two as we go through this. And so when you get into this pay-for-performance

[00:28:30] in these groups that have a consistent metric, I think it's naive of companies to assume they will all try to achieve this and there's a number. They will all basically be put into the gladiator arena around whatever metric you have and you have to do better than the other person. And so that to me is probably the biggest issue with true pay-for-performance on metrics is not only the lack of innovation, but I spend time actually figuring out, you know, like, instead of innovating, I'm like, how do I make Paul look bad?

[00:29:00] Like, because I'm, you know, like... That force distribution or the stack ranking system, you know, the vitality curve, Jack Welch's vitality curve, that's implicit in any merit cycle. I know it's not as visible, but it's implicit. You are all competing for the same dollar. So one way or another, you are being ranked, even though it's not stack ranking in the truest sense of the expression. Yeah, and they know it. I mean, and that's the thing. Sorry, was there a bit of background noise there? You're fine. They know, right?

[00:29:29] Employees know that this is happening. You know, that's why I say that that's not anyone's people strategy, right? Like, comp's complicated, but it's not that complicated at 30,000 feet for people to not figure out what the kind of one or two key drivers are. Yeah. I do think, though, we still... The mechanism of pay for performance is a culprit here. And that you think about a lot of the research

[00:29:58] is on very transactional definitions of performance. Do this puzzle. Do this thing. Work is more complicated than that, too. And so can be the ways that we reward for performance. You know, I think the merit cycle as we know it breaks. You know, the... And James will hopefully jump back on here shortly. But, like, the way we've executed salary-based pay for performance is a problem. The way that we've chosen to do performance management, performance ratings, and calibrating bonuses,

[00:30:28] it's probably broken. It's interesting. I actually think it's more... So when you think about moving up through the company and the way they create, like, the STI mix, right? I actually think they're more ripe for the whole company the further up you go because the premise is always, you know, more of your base pay is going to be based on, you know, or your STI is going to be based on your individual things because you can't control the narrative of the company. You know, and you at senior management, we're going to give you

[00:30:58] more of your bonus based on, you know, the entire company. Right. That's there. And so now your short-term incentive mix is based on innovating and doing whatever. But if I'm buying a car from a company, I sure as shit hope the guy putting the car together on the line, you know, that person is incented by the company doing well, not actually just a volume of things that he can shove through there. And so, which is his metric to your point of like,

[00:31:28] so I actually think in some ways they've got it right, just not at all the levels because if you basically said your incentive at the bottom is for the company to do well, like, oh, I need to create loyalty a good product. We still need to have volume. Like, and let me figure out how I can get more cars off the, you know, off the factory floor and I'm on the factory floor. How do I figure that out? Yeah. That's right. More of them better because I'm going to make more money as opposed to just how do I do more? I don't care if they're better. That's right. And James,

[00:31:58] just to, since you, you, you're hiccup with the technology that you're back on. sorry about that. Sort of what we debated while we were gone. It's all right. It happens. But the, where I was headed a little bit was the mechanism of sort of broadly defining paper performance is part of the culprit here. Like, there are definitely, like, the way we define performance will be, we codify performance. That's what Sean was, you know, you tell me to produce more things. I'm going to produce more things to get more dollars, maybe. But that's not, that comes at a cost of quality. That comes at a cost of other things, you know.

[00:32:28] So don't deploy that is sort of my take, right? Like, there's different ways to define and codify performance for different roles. And as a result, pay for it differently too. Don't assume it's the merit matrix. Don't assume it's, you know, a bonus that's linked to a performance rating. I think there's other ways to describe what paper performance is that do still work in circumstances. But it's, it's not the way we've been doing it. There's no doubt it's the way, the way we've been doing it isn't working. But is there a better way? I think the fundamental assumption is that we should be doing it at all.

[00:32:58] That's, that's the problem for me. And see, what I, what I'm hearing is that we're just not doing it well enough. And I've heard that for so long now and I've seen so many iterations on better ways of doing it. And none of them work because the premises, the premise of pay for performance is that you could be doing more, but you're choosing not to. That's the premise of it. And you'll only do more if I pay you to do it. That's the premise. That's the assumption. That's the social contract. If we're saying pay for performance. And that's where I think, that's where I think we're solving for different problems. So for me, it's not, I could do more. It's more,

[00:33:28] I want to know that I'm not being treated differently or that I'm not treated inappropriately given my output, right? So the question, so how do you solve it? It's just a pay fairly. Well, and so how do you, and do you pay? And so where, where I get stuck on this, James, sometimes where I get stuck is I'm more in your camp than Paul's to be fair. I think like, I do think people want to be good humans. They want to do well. And if you paid, you know, you know,

[00:33:57] it's a legit, you know, it's a sunk cost, you know, in theory, right? Like if the business goes down a little or growth slows, you know, you can move performance up and down to ride with the business up and down. So I think there's some other reasons it's been introduced into the world beyond just this kind of performance thing. But how do you actually pay? And so do you pay, you know, if we pay both of you, you know, $100, and like, how do you then differentiate

[00:34:26] between two employees or do you not? Yeah, you don't. Because in essence, well, but if you don't, so let's just assume then, let's just assume you pay, well, we're just going with all men on this call, but I've become Shauna for this call. So let's assume that I make 100, Paul makes 100, I'm female, but I output much more than Paul. Okay. So first of all, how do you know that output's high? Again,

[00:34:56] my point is that you only know if output's higher if it's a measurable transactional factory-style job. My point is you don't know. If it's a knowledge, I really want to think specifically about knowledge workers, which makes up the most of our economy. Let's say the factory job. So the first point is you don't know that you Shauna produced more. Like there is no metric for what production is in knowledge work because we're all working together to get things done. So whether people work harder or less harder or more effectively or not, they may be, but we'll never know the answer to that. I don't know

[00:35:26] if I agree. And it's, on the margin, yes. Is it hours? We don't want to count hours. But I do think, I do think there can be a discernible objective difference in the contributions of workers. I think it's just too broad of a stroke to say you can't, right? Like I was a knowledge or I was a consultant. I remember a year, everybody on the same team knew that I billed 60% more hours than them organization paid me the same, right?

[00:35:56] Like they understood that that was a different output. And then the next year when I wasn't as high of a performer, I understood this wasn't my year. I do think those are objective criteria for knowledge work that that's a circumstance in which pay for performance works the way it, if it's designed intelligently. But a bunch of, you know, pooled analysts that are all working together, that's harder. I agree with you. But you can do all that in an hourly model and also still annoy all your customers to the point they never come back. And we've seen plenty of consultants that are able to do that high volume but poor customer satisfaction.

[00:36:26] So again, my practicality on that is always though the fundamental problem I have with that, James, is that when you put it into practice and let's assume that I make the same as Paul and I'm of the mindset, I understand like the science behind when you do these things and it's about the interview and the whatever, but I'm also like actually from coaching AAU, Paul, like the people on the team know. Like if you actually told them there's no ramifications for this, which one of you

[00:36:55] is the best employee legitimately? They know within reason, especially if there's difference. So if I'm, you know, if Paul is doing much better work than I am for all the right, every other reason and I know Paul's doing a lot more work, Paul probably knows he's doing better work and more work. Will he stay or go? And so I have this like in a company of one, I buy that. I struggle with, well, if I do that, who's more likely to leave and who's more likely

[00:37:24] to come and churn? Paul is more likely to leave because with paid transparency, Paul's going to be like, well, we both make a hundred. I'm so glad I get to buoy Sean up every day. He sucked for a long period of time or doesn't suck enough to get fired, but sucks enough that I have to carry some of the load. Then I think the human nature part comes and Paul's like, someone comes and says, Paul, I will pay you a hundred and two, which is not really enough to move people. Generally, they won't move for a two percent change, but he'd be like, but actually,

[00:37:54] I feel like that hundred and two might be fair. Grass isn't always greener. We know that. Usually greener where you water it. I heard that for someone say that. Great phrase, by the way, the grass is greener where you water it. So, but then you're, again, you're assuming that that person is money motivated. And again, we coach people to be money motivated and keep doing it. I don't think it's money motivated in that case. James, I think it's the fact that I'm not paid fairly because I am creating a lot more value to the company for exactly

[00:38:23] the same dollars. And the reason I said a hundred and two. Yeah. So, but again, you're making the assumption that fair pay is about the individual. It's not about you. It's about what we can achieve together as a team. That's our goal here. So, then what we have to do is look for examples of companies that do think this way and whether or not they've been successful. So, the most extreme example, and by the way, there are varying degrees of doing this. My principle is that we want to de-emphasize pay to the extent possible. The most extreme example is a completely flat pay structure where everyone gets paid the same amount.

[00:38:54] Yeah, and yes, that does exist. So, there's Whole Foods, for example, in Yorkshire in the UK. they've outlived many Silicon Valley tech giants and they have much higher degrees of employee satisfaction, very, very high customer satisfaction, and they get mind-blowing numbers of applicants for every time they open a position. Everyone gets paid the same and there is one job description. So, people work depending on where the business needs them to work and they do as much as they need to do to help everyone succeed because they all want to be there. The motivation is the work. So,

[00:39:23] my point is we're too eager to skip past the work. The work is always assumed to be this negative good that we have to pay people to do otherwise they won't do it. But if you create good work then people want to do it. And again, the unit of work should match the unit of reward. If you're working together to do something, Sumo Whole Foods, foods rather, the unit of work is the company's success. So, it doesn't matter whether one week someone does a bit more than someone else or one person does a bit more than that. Social pressures

[00:39:53] normalize that and when that person does more then you recognize that and you try and help them out and you try and catch up. Social forces match that kind of thing up. Now, if you've only got someone coming into a company that wants more money for every unit of work, again, first of all, we've coached them to think that way because they've had a career of pay for performance. They've had a career of saying, well, I'll only do it if you give me more money or I'll only get it done if you pay me and then they take that attitude. We don't want wealth addicts in our companies. We want work addicts in a healthy way. We want people that are in it

[00:40:22] for the work. So one extreme is a completely flat company but I'll say to a lesser degree, if all your roles are doing the same thing, whether someone's new to it with no experience or has been there for 10 years doesn't dictate the value to that role and our assumption with the salary band is that there are people that should be at the bottom and there are people that should be at the top. I think all the assumptions around that are not based in research. They're based in management theory and factory style work and predominantly the military construct that created the salary band in the first place. Entry-level people

[00:40:52] take entry-level pay and you kind of go through the ranks and it's very regimented. But the fact is that someone new to the role can offer a lot more value than someone that's been in the role from an innovative perspective. The justification for variance in the salary band doesn't make any sense to me and we see it in the satisfaction around pay. Again, all the data points to the fact that we're not able to do this in a way that people perceive as fair. So I would say the only thing that should impact your position in the salary band is, well, I don't believe in salary bands. I think we should just

[00:41:21] pay for the role and then that should be it and we should have as few roles as possible and we should have as flat an organization as possible. And I think part of the problem is then organizations have become less and less and less and less flat over the years. The pay gap has grown and grown and grown. The gap between the bottom and the top has grown. The lowest wages have stayed low, even gotten lower while the highest pages have risen over a thousand percent in the last 20 years. Everything has become an economic event. You can only get more if you perform and you can prove it. You see, that's why people get promotions

[00:41:51] and they look for promotions because it's the money. They don't want to be a manager. They want the money that comes with it. Then we turn around and act surprised where they're not good managers. Well, yeah, of course, because you took the politically most savvy and gave them a managerial role and then wonder why they're not good people leaders because all it is is a game. It's a game that we've trained people to play and that's not good for the company and it's not good for the work. The companies have done really well in this space. U.S. companies are Nucor Steel, Patagonia, Semco in Brazil and China. You've got Haya. You've got Mondragon

[00:42:21] in Spain. You've got Handels Bank in Sweden. Decentralize and flatten out their structures and make pay the smallest possible conversation and the goal is making work that people want to do and a company that people want to be at. If you want to go and get more money somewhere else, well, go ahead but that's not what we're looking for here. We're looking for people that want to be here. I always come back to as the uneducated one here, James. How do you make it happen? Because in theory if you have ranges and grades and do whatever

[00:42:50] to pay for that role, you probably are going to have to red circle people. What do you do with people that are above? You tell them you're not going to get an increase into the change. In some places you literally can't pay them less legally. For me, the practicalities how do you get there and then you're going to lose hype which is fine. I think there's that piece and of course depending unless you really have that CEO buy-in

[00:43:20] if you're owned by a PE if you're public or whatever to make this work over two, three years there's going to be hiccups that happen. What are the best practices for companies to make this let's assume we want to do it. How do you see what would be the best path for someone to get there and tackle the hurdles? Well, you mentioned private equity there is and I can't remember the name of this you can look it up and add us the notes afterwards but there is one private equity investor

[00:43:48] who heavily encouraged his portfolio to decentralize and be much more employee driven and have much flatter structures and less autocratic management systems so in private equity there's a bit more innovation I would say than VC backed companies when it comes to people and motivation but there is one good case study with a private equity company that did this but to your point Sean like change is tough so this all involves relinquishing control so the thing about

[00:44:18] pay for performance what it really does is scratch the itch of control oh here are metrics if I take our company goals and diffuse them down in Peter Drucker's management by objectives model and everyone does all the things that it filters down to do then we're all going to achieve our top level goal and it all works in the assumption that the CEO is the only person that can ever make any strategic decisions but the companies that have survived decentralized decision making and work in a much less autocratic model so if you want a good example of a company that's done this I'd like to pick industries that are traditionally quite

[00:44:47] not quite autocratic and don't think about things in this way Nucor Steel is probably the best case study of a company that broke free from a lot of the assumptions around pay for performance now they do still have some performance based pay and they still do some of these things but they are the biggest steel company in North America and they faced a crisis of survival at one point and decided that the solution to that was to move away from a top-down autocratic model to a decentralized bottoms-up strategy-driven culture

[00:45:17] where information is shared laterally and the strategy is built collectively and when you start doing that then the work becomes more interesting because people have a say in that and a voice in that so but that came from the top down so it's your point if you're going to change things you either need to come from the top down or it needs to be a new company that's going to out-compete the old ones because they're going to offer people a much more fun place for people to work and they're going to get the good talent not the companies that are doubling down and pay for performance or you see it a lot I mean

[00:45:45] I believe in it I think sorry did I cut you off or did you cut out I couldn't like I believe in it James from the standpoint of I believe in like functionally I believe in the premise I'm always worried like how do you do it and I say that because if you look at startups like four or five six people like they pay kind of for that role but everyone's in the same boat paddling together for the well-being of the company thing and then somewhere along the line

[00:46:15] to your point James it gets too big and now I have to control things and understand what people are doing and they kind of lose faith in that initial little I could huddle up in the morning and let them decide to now I have to see and I don't know if it's entrepreneur's dilemma that I have to have control like so I functionally believe it because the best fastest you know gross companies are small and they're doing it for the right reasons for the company to be better and whatever and somewhere that changes I don't know if it's how many

[00:46:44] people per department like there's probably research out there so I functionally believe it I just am like how do I and I'm a firm believer like and just do the right thing and I'm 100% James I think most people if you pay them reasonably fair and treat them well will give you their best effort they might whine about their pay but I think functionally they still bust their ass to give you their best product like I know that's a little blue skies rainbows and unicorns as some people will to your point I'll be a two because I'm a two

[00:47:14] but I think most people want to do that financial contract you gave me money I don't care how bad you treat me I will do well so I believe it I just think I think it's great it's super great research I'm just really curious how you make it all happen and the discussion of how we pay for the role has come up a lot with equity for sure and I do think so even though I still disagree because I think even like Nucor is my favorite example because they still have individual incentives actually

[00:47:43] but I disagree with the conclusion but I applaud the fact 100% that you're challenging it like I think I just want to I want to make sure that's clear for everybody like I'm a big fan of let's be careful about making dogma out of the stuff that we've been doing forever and so I applaud you and I do think the one place we 100% agree is different strategies can be effective you just got to think it all the way through and what are you solving for what's going to produce

[00:48:12] the effect that you want and certainly if you're a you've got opportunity to choose a model choose one that's going to work for what you're addressing if you're looking for innovation teamwork you know a collective focus on the outcome yeah individual incentives is not going to get you there right if you need to migrate to it you might have to pick and choose where do you make change to sort of get there so I love the fact that you're challenging it you know I do think there's a lot of wisdom in thinking about how do humans really work together the best

[00:48:41] and what's the right way to reward given that given all the constraints we have about starting points about competitive markets about greedy humans that do exist unfortunately and how do we navigate that gap I think is the hard part but yeah I love the fact that you're sort of calling us all to task for sure I always will and I want to answer Sean's question as well because he asked a question about that so the scale question is always something that comes up and again I always point to Nucor

[00:49:10] and Hire and Semco and Mondragon there's a whole bunch of companies that prove that this mentality operates at scale so it works at scale the problem is that when companies scale up you go from that startup model when there's a few people that trust one another and at some point you lose it and you lose it because autocratic management thinking comes in the traditional factory style of management top down decision making we need to treat this entire group of people as one company only works for so long and the psychology really comes from Robin Dunbar

[00:49:40] so Robin Dunbar coined this term Dunbar's number which is 150 and 150 is the cognitive limit for the size of the group that we can create reasonable connections with and many companies have built their organizations around Dunbar's number so Spotify did this with their squad size 150 Semco did it accidentally Ricardo Semler actually stumbled across this 100 to 150 range and later realized that it was Dunbar's number George R.R. Martin has 150 characters in his books there's useful applications

[00:50:10] to know that we struggle beyond certain sizes but more importantly we can only form meaningful work relationships with about 10 or 15 people so if we're truly trying to create groups for solving problems then it's a much smaller group so that's when you can start thinking about structuring an organization around humans not around command and control assumptions can you still hear me by the way I'm getting a few connection warnings are you still there uh oh we might we might

[00:50:40] yeah I don't know where is James are you in San Francisco is that where you are we're still here yeah it's glitching quite a bit unfortunately sorry I've been I've been having issues this week and I need to do something about it um can you still hear me okay we can still hear you okay I'll just do it we'll do this because I know we're getting near the longer period of time we probably will do a follow-up because I think at some point we love I mean whether we talk about the role in pay like I'm with Paul uh before I ask you the last

[00:51:09] question I'm kind of somewhere in the middle and a little more altruistic on the on the team thing how we practically get there but I 100% love the fact that this forces the discussion and forces people to be like well why do you have them on that metric and they're like because the guy before me had it lady before me did it and that's what we can measure you know easy as opposed to so I think it's great like why do you have the matrix like there's somewhere in the middle we usually ask we'll see if

[00:51:39] the bandwidth holds here for a second James um if you could fix with all that in mind any one thing in HR what was the one thing you'd fix in HR bandwidth so many things nothing to fix it'd be bandwidth yeah uh can you hear me okay sorry about this guys I don't know why I'm having these issues yeah um it will record it will record cleanly on my end so I'll that's how people will know we don't do a lot of post edit yeah

[00:52:09] so okay so the one thing I would fix is stop ignoring the work stop focusing on pay and control and measurement and performance and stop skipping past the fact that the work is a thing that we should putting our effort into if we can create if we can create computer games involving falling four square bricks that people get addicted to there is absolutely no reason why we can't create work that people enjoy like we skip part

[00:52:39] we work everything works there's so many things start with the assumption that work is a negative good that work is something no one should ever want to do and the only way we're going to get people to do it is to persuade them with money and incentives and that all comes from the factory floor but even then it wasn't true there is something enjoyable about putting things together the problem was that we commoditized and standardized it so much we took all the joy out of it but the work is a thing so I love the idea of work as a product which is an emerging concept which is that well look your customers are your employees and your employees are your customers

[00:53:10] and your employees are customers of the work that you offer them the question is can you make that work into something they want to do that's a way bigger problem to be solved to me than designing incentives or job architecture or bonus programs or equity models or any of this stuff because if the work's interesting enough then you really don't need to worry about the rest of that stuff and it really baffles me how willing people are to skip past that question and assume that the work is an exit of good rather than saying all work can be interesting to hire a video game designer

[00:53:39] look at your work and say how can we make it interesting to people how can you make it something that people want to do and then you've got to ask yourself not what do we need to do to get them to do it but what are we doing getting in the way of doing it that's the bigger question for me it's a complete flip in the mentality and so many of the HR practices that we operate are getting in the way of people's ability to work tight job architecture that limits the ability of people to work outside their roles is getting in the way of their ability to work and collaborate incentives are getting in the way of their ability to

[00:54:20] I appreciate coming on as you go through that I'm always like I 100% agree but I do think there's a lower boundary in boundary theory of what you have to pay someone to come to work I love doing what I do I love the stuff I'm doing here but if my employer decides that they want to pay me

[00:54:50] of pay versus loving my work thing I think there's some cool boundary science that goes with that what is the truly what is a good culture worth because everyone's always like it's worth something and how much and they're like well I don't know that's a cool number it's literally worth something this has been great James really appreciate you coming on it's what pay costs we'll flag the book in there it's a good read take it down and listen and definitely

[00:55:20] if nothing else make yourself go ask questions that are there I really appreciate you coming on James and thanks for jumping back on Paul it been kind of weird not