Dear Bob ... I'm not sure if this is an ethical issue or not, but I've recently heard the same story from three different people at three different companies. They recently had their reviews with subsequent salary increases. They each were top performers at their company and received good reviews. As a reward they got a larger salary increase then their co-workers who did not receive good reviews. This is all f Dear Bob …I’m not sure if this is an ethical issue or not, but I’ve recently heard the same story from three different people at three different companies. They recently had their reviews with subsequent salary increases. They each were top performers at their company and received good reviews. As a reward they got a larger salary increase then their co-workers who did not receive good reviews.This is all fine. Where the issue comes in is that the range of salary increase between a good or excellent review and a poor review ranged between .4% and 1.5%. The question is, where’s the incentive to work hard? One of the people I talked to had thought about this for a while and came up with this math: Suppose the people who got a poor review (because they were spending 1 1/2 hrs per day on the Internet) were making $50,000 and got a 1.5% raise while the good review person got a 3% raise. Then those receiving poor reviews got $750 less in raises, but because they spent the time on the Internet they also got paid $9,000 for doing no work. In effect they came out $8,250 ahead. Good for them – they’ve found a company that pays for non-performance.No wonder the good performers leave companies like this.– Surfing for an incentive Dear Surfing …My own opinion is that this isn’t an ethical issue. It is, however, quite serious in the context of organizational effectiveness, and not for the reason you might think.The real problem is from trying to use the compensation system as a performance motivator in the first place. While it’s popular to try, it’s almost always a losing proposition, for several reasons. The first is the situation you describe – it’s almost impossible to offer a big enough differential in salary increases to make working hard and smart worthwhile. Even a 4% difference generally results in no more than about twenty-five bucks a week in spending money. The second reason is more subtle. Imagine you provide as big a differential as possible to the top performers. What you’ve now done is to provide an annuity. Even if the top performer loses motivation and retires in place, the raise you awarded last year continues to pay out forever, or at least until the employee leaves.There’s yet another problem: At some point in the proceedings you’ll have increased the pay of your top performers beyond what the market will bear. From this point forward they’ll be disappointed once a year when you tell them they’ve hit the ceiling; meanwhile your company now has a financial incentive to replace its best talent with lower-cost recruits. Not a healthy situation.You could, instead, award a one-time bonus for performance instead of a salary increase. This makes a lot more sense: Since it’s a one-time award instead of a salary increase you can pay out between two and three times more money and still come out whole. Don’t, by the way, communicate to any employee that this is intended as an incentive. Bad idea: As Alfie Kohn points out in “Punished by Rewards” you are, in effect, trying to bribe your employees to perform and they know it. Instead, present it as fair compensation for top performance and leave it at that. A couple of other points while we’re at it: Make sure all employees know, publicly, what the range of bonuses was for different levels of performance, but (of course) not who was rated at each level. It’s important that everyone perceives the system to be fair; also that everyone perceives it to be unequal. You want every employee to see their place of employment as a meritocracy; this is a great way to communicate that fact.There is a risk here, by the way: Annual bonuses quickly become entitlements, demotivating employees when they don’t get them but failing to motivate employees when they do. This is why it’s so important to present them in a way that makes it clear to all employee that they’re in control of their own compensation destiny. It’s also why it’s very important to explain that this is simply fair compensation – value given in exchange for value provided – and not an incentive to perform.Second point: Salary increases are best restricted to adjustments based on how market rates for each position have changed (cost of living, more or less). Since it’s both impossible and a bad idea to use salary increases as motivators, don’t try. Third: As employees increase in skills, make sure to promote them, increasing their salaries commeasurately as you do so. This is the other side of the coin: As an employee’s skills increase his/her market worth increases as well. That’s what promotions are for.The most important consideration to remember as you design any compensation is that money makes a dangerous motivator, but it’s one of the most effective communication tools you have.Hence the phrase, “putting your money where your mouth is.” – Bob ——– Technology Industry