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Take everything you think you know about employee compensation. Put it all aside (other than the last two editions of Keep the Joint Running). Read two books: Robert Austin’s Measuring and Managing Performance in Organizations and Alfie Kohn’s Punished by Rewards.

You’ll realize that the two assumptions on which most modern compensation systems are built — that managers can objectively measure employee performance, and that compensation systems should use those measures to create incentives for stronger performance — are pretty much worthless.

I devoted a column to Austin’s book (“Can metrics be saved?” Keep the Joint Running, 11/7/2005). But while I’ve mentioned Kohn in my books, I was surprised to discover I’d never once mentioned him in Keep the Joint Running.

I don’t entirely agree with Kohn. In particular I don’t agree with his rejection of praise as a leadership tool. Still, his core insight — that compensation-as-incentive amounts to bribing employees to perform — is what first drove me to re-think the whole subject.

Credit where it’s due.

We’ve spent two weeks on how to structure compensation. Underneath it all is this chain of logic:

  • Motivating employees is something business leaders are supposed to do. The best you can hope for from your compensation system is to avoid demotivating them.
  • To avoid demotivating employees, compensation systems have to be fair and perceived as fair.
  • To be perceived as fair, compensation systems have to have clear, strong connections to both marketplace value and employee performance.
  • To connect to employee performance, managers must know how to assess it. Not measure it. Assess it.

In business, some employees have jobs whose performance is easy to quantify — factory workers, for example, who process some number of widgets per hour with some (presumably smaller) number of defects.

That some employees have jobs whose performance is easy to quantify has led to the strange conclusion that all of them do. Managers who haven’t fully quantified them just haven’t been clever enough to manage the task.

That isn’t the case. In particular, the list of IT jobs where performance can be quantifiably and objectively measured is quite short. In most shops it’s entirely empty.

Stop trying to objectively measure the performance of IT staff. It isn’t going to happen any time soon, and when it does it will mean we’ve degraded the profession to the status of an assembly line. Assess staff performance instead, recognizing that many dimensions of the job have fuzzy boundaries and subjective qualities.

Here are some ideas for what you might look for:

What each employee accomplished. Keep a list for each employee, which should include the accomplishments of teams to which they belonged. Encourage employees to keep their own lists, too. If you’re leading with maximum effectiveness, you won’t know everything employees achieve.

What they didn’t accomplish. You want self-starters. Employees who are such self-starters that they disregard the work you assign to them, though, shouldn’t be rated as highly as those who get it done. Botched and ignored assignments matter.

How their performance in quantifiable tasks compares to their colleagues. Many responsibilities aren’t quantifiable. Some are. For example: Some developers plow through their share of the maintenance and enhancements queue faster than the rest, with higher levels of end-user satisfaction and fewer bugs. Value this.

The extent to which they pitched in. Sometimes there’s dirt on the floor. You want whoever notices it to grab a broom and dustpan and take care of it. Stuff needs doing. You can’t list it all in advance, put it on job descriptions, partition it all out, and schedule it.

How well they supported their colleagues. “Team” is an overused word. It’s a team when its members align to a common purpose, trust each other, communicate well, and help each other out. You want this. Some employees do more to make it happen than others.

Good judgment. Some employees make better choices than others. The worse ones might do so deliberately through malicious obedience, or because they just can’t figure it out. Regardless of the reason, employees with good judgment are more valuable than the ones who need everything spelled out thoroughly enough that their job is just painting by numbers.

Measuring the performance of IT professionals is an infinitely complex task. Assessing it, on the other hand, is not. You have to take on just three responsibilities.

The first is to know what you value. The second is to communicate it.

The third is to pay attention so you know if you’re getting it.

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If it makes you feel better, compensation has improved.

I’m not talking about the amount. I’m talking about how it’s administered.

Not that long ago, many companies gave men raises when they got married. Women’s careers stalled under the same circumstances.

The logic was impeccable: Married men needed more money to support their households. Married women, on the other hand, no longer needed as much. After all, they had husbands to support them.

The world does sometimes get better. Achieving perfection is another matter. If you expect it, you’re sure to be disappointed, especially where compensation is concerned.

This, and other thoughts, occurred to me as I read my correspondence from last week’s column on fair compensation (“Poor Joe,” Keep the Joint Running, 10/22/2007). What other thoughts? Glad you asked.

Why not base pay on value? Most employees think their pay is and should be based on the value they contribute.

It’s a reasonable thought. That value is why companies employ people in the first place (for more, see “The 70% solution,” IS Survival Guide, InfoWorld, 3/4/1996).

Here’s the problem: Whenever a company bases compensation on anything other than what the market will bear, it faces one of two situations. Either it can get the same value for less by replacing its employees with less expensive alternatives, or its employees will leave for better paying employers.

Basing pay on value is inherently unstable.

There’s another problem with value-based pay: Measuring the value. When you’re dealing with the sales force it’s easy. They sell. What they sell has a known margin. Do the math. No problem.

For just about anyone else, the connection between their work and the value they deliver can’t be turned into a number that will make much sense. The value is there. Measuring it unambiguously isn’t a problem any of us are likely to solve any time soon.

Can you really give a $75,000 employee a $20,000 annual bonus? No, you probably can’t. The problem is that every year you employ this computation, you’re assuming the employee will stay another ten years. Some employees will; many won’t. If that sort of longevity is typical in your company, annual bonuses this large might not be a bad idea. If it isn’t, don’t fret.

First of all, unless your company is a truly awful place to work, the average employee turnover in IT is unlikely to exceed 20%, which means the average duration of employment is at least five years. That still allows more than $10,000, which isn’t bad at all.

There’s another alternative, too, at least in publicly held or soon-to-be publicly held companies: stock options, vested over ten years. It’s true that the accounting for stock options has become controversial. The basic idea remains sound. Vesting options over ten years eliminates the risk of basing compensation on the assumption of ten years while getting much less, and in addition creates a financial incentive for employees to stay with the company.

In fact, you can give a smaller option grant and vest it over five years, especially if your company has a reasonable track record of stock price increases, because it’s the employee’s expectation of value that matters most.

Not a bad set of outcomes.

Pay for performance? Great. One question: How do you measure performance? This is the magic question, whether you recognize performance with variable compensation or prefer to use simple raises.

As a manager you have to have a way to assess … not measure, assess … how well employees are doing their jobs. The distinction between measurement and assessment is vital.

When you measure — when you establish clear, objective criteria regarding how well each employee accomplished the goals, objectives and responsibilities you’ve established — you face a hazard: You get what you measure. That means anything you mis-measure employees will get wrong, when you measure the wrong things you’ll get the wrong results, and anything you don’t measure you won’t get. Especially, what you don’t measure you won’t get.

Think of what you ask employees to do, all the time, in addition to their formal responsibilities: Participate in ad hoc committees; take the initiative when something needs doing that you don’t know about; and help each other out when one gets stuck and another knows the solution; to name just three typical examples.

If you assess employee performance, these will count in their favor. If, instead, you measure it, when you ask you’ll get a predictable, and entirely deserved response:

“Why would I want to do that?”

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