"Merit Based Pay" or "We don't care about productivity look at our cost control" is the first in a series of blog entries which seek to blast away the human resources myths which exist in the software industry.
It's traditional in the knowledge worker world for companies to have pay scales and levels e.g. Level 56 = $24,677 to $33,103. Any employee who is a Level 56 grade will receive a base salary between the two amounts. In some companies, these scales are lies. Often there is a mid-point or median. In my example above it might be $28,500. Companies' executives decide what kind of performance they'd like to achieve for stockholders. Then then decide whether they need upper quartile, 2nd quartile, 3rd quartile or lowest quartile employees to achieve those goals. In many large companies today, they don't pay more than the 3rd quartile. So in my example the pay scale is truly $24,677 to $28,500. In this respect, most pay scales are lies.
This is the classic cost accounting mistake of focusing on cost. There are numerous examples of programmer productivity being upwards of 10 or 20 fold better between a good software engineer and a bad one. In fact, some studies say the worst to best can be 50 fold [1]. However, a good manager knows that they only need to pay a modest amount more for good people - perhaps the upper quartile for a pay grade. So why not hire only upper quartile candidates? Pay 50% more and get 1000% better productivity. Hire less people and control costs that way. Isn't that the best solution?
My feeling about why this doesn't work in large companies relates to relative standards. It is assumed that hiring managers will not have good metrics for providing balanced equity across the organization. It is further assumed that hiring managers may not be good at screening candidates. It is further thought that hiring upper quartile people sets a dangerous "elitist" example for engineers when other jobs in the company are not hired this way. In other words, mediocrity is both assumed, desired and controlled. Specific grades are generally awarded based on length of service, experience or age as this is assumed to be the most reliable indicator of someone's contribution and their value to the organization.
So companies which claim to be meritocracies, in fact, are not. They pay people in a very narrow band. In my example, you can be sure that everyone on that Level 56 grade is being paid between $27,000 and $28,500 despite the fact that some of them will be 10 times more productive than others.
The way to break HR Myth #1 is to refocus the business using the Throughput Accounting focus of productivity first, investment second and cost last. Cost first generates mediocrity and mediocrity results in very poor performance from a software engineering organization.
[1] Reference: Sackman, H. W.J. Erikson, and E.E. Grant, Exploratory experimental studies comparing online and offline programming performance", Communications of the ACM, 1968, 11(1)
