The linkage between reward and performance is a fairytale as there is no research that has been able to prove that economic rewards lead to better performance in teams and organizations.

The theory and practice of driving performance through pay comes from western cultures, primarily from the US, which is founded on the basis of materialism. Here, as goes the old idiom, even the streets are paved with gold. What matters most in the American culture is money and therefore, it is believed that what drives people is also money. This has been proven wrong on many instances, as it implies a loss of human capacity when we say all that drives people is money. Factor this: A comparison between an organization for profit with a non-profit one, reveals that despite the pay being low in a non-profit organization, the motivation is high, vis-à-vis an organization for profit where the pay is high with moderate motivation.

This materialism is at the foundation of most organizations today. If we were to question the thesis that people perform mostly for money, then what is the reason behind performance? This creates a crisis of purpose – If we are not here for compensation, then what are we here for? Ironically, not many organizations are ready to have this level of conversation.
Companies want to hide themselves in simplistic theories denying factors that really affect performance - like control over the work performed and relationships created amongst people. When companies are able to create groups of people that can take decisions on their own and relate well to each other, high performing teams emerge. Teams related to each other with empowerment are the best performing teams and compensation is just a matter of fairness and equity.

The only real use of performance appraisals is as a way for companies to claim sovereignty over individuals. Nobody likes appraisals in companies unless they are among the top 5% performers. There is nothing that destroys performance more than the appraisal system itself as it creates a divide and a patriarchal relationship between people working together.

What is the alternative for organizations then? It’s simple. Rewards need to be designed to be transparent and should be based on equity and fairness. People among the same function should be paid what the market is paying for those people in the same universe of role and grade. Companies should pay for group performance and not individual performance. Retention should be based on principles like valuing relationships and providing control and freedom and not on mid or long term promise of money. I believe that companies using retention bonuses as means to keep employees create a very cynical paradox: Those employees who are the best performers and most engaged and committed need to paid more money as means of retention bonus. Retention happens when you provide an opportunity for choice and control, ensuring that knowledge and training is provided for the employee to make the right choice for the business.

Many developing countries are importing a dying model from a society where the current pay philosophy is under widespread attack. The formula for performance is simple: Equity and transparency in pay plus strong group relationships and local choice - these are the new bases for performance.

Peter Block is an author, consultant and citizen of Cincinnati, Ohio. His work is about empowerment, stewardship, chosen accountability, and the reconciliation of community.