- Make Sure the Promotion System is Unassailable: In companies where promotions are not available, merit pay systems tend to become contentious, because merit increases are the only way to earn more money. When promotions are available, employees tend to focus on promotions rather than the merit pay system. A promotion system should be founded upon a series of job grades, each with a salary range in line with industry standards and regional averages.
- De-emphasise the Merit Pay System: Studies have shown that, when information sharing and coordination are essential, organisations that reduce pay differences between the highest and lowest paid employees tend to perform better over time.
- Tie Profit Sharing to Economic Divers: Identifying a key economic driver and tying team profit sharing to it avoids suboptimisation by ensuring rewards are linked to improvements as a whole.
- Reward based on Span of Influence, Not Span of Control: Evaluating individual results rather than group results, creates competition rather than collaboration amongst team members. Profit sharing should reward large teams rather than individuals or small groups. This reward system fits well within an Agile environment, which takes the broad approach of involving everyone in the development process.
- Find Better Motivators than Money: Do not use money as a primary motivator. Invest in people by developing their skills, share information widely, emphasise Leadership rather than Management. Emphasise the intrinsic rewards of fun, growth, teamwork, challenge and accomplishment. Monetary rewards should be treated like explosives! Use them lightly and with caution.
(Taken from ‘Team Compensation’ by Mary Poppendieck, Aug 2004, reprinted in ‘The Best Software Writing I’, selected and introduced by Joel Spolsky)