Rewarding Excellence: Pay Strategies for the New Economy

The decision about whether to reward a person or a team turns on a single question that most pay design ignores: how much does one worker's output actually depend on another's. When work is genuinely independent and individually measurable, individual bonuses fit. When the work is knitted together—when what happens on one shift shapes what the next shift inherits, when a team leans on staff groups to get anything done—rewarding a team for its own separate results starts to do damage.

The mechanism behind that damage is suboptimization. A team that develops its own way of doing things and grows close can become myopic about the larger organization. Members stop sharing what they learn. They optimize their piece and let the seams tear. The greater the interdependence between teams, the higher the reward should be set—gainsharing or profit-sharing that pays members on the performance of the whole unit rather than the fragment they can see. Those organization-level plans carry a poor line of sight, but when the work is tightly linked they may still be the best choice, because they refuse to reward differentiation that has been pushed too far.

One complication is worth holding onto: the nature of the work and the nature of the people don't always agree. Some individuals are individualists who prize working alone and being paid alone; others are collectivists who value shared and social rewards. When the two dimensions align, the choice is easy. When they conflict—an individualist dropped into interdependent work, or the reverse—pay according to the work. The work is the major determinant of what behavior a situation actually needs. A reward system that fights the structure of the work will reinforce the wrong interdependencies and, however well-intentioned, do more harm than good.

How to

1. Map each role's actual output: can it be attributed to one person without arbitrary allocation, or does it emerge from a set of people?
2. Match the reward unit to that map — individual pay for genuinely separable work, collective pay for interdependent work.
3. For mixed situations, split the incentive so the individual portion covers the separable part and the team portion covers the joint part.

Watch out for

• Assuming interdependence from job titles rather than observing how work actually flows — many 'team' roles are individually measurable and vice versa.
• Using team rewards on small groups where one member's slack is invisible, which invites free-riding.

Two forces have reset what organizations must ask of the people they employ. Knowledge is growing at a rate no earlier generation of managers faced, and capital, competition, and capitalism itself now move globally. The result is a level of competition never anticipated in 1960 and performance demands on companies and their leaders that keep climbing. In that setting, human capital becomes an organization's chief source of competitive advantage—not a slogan but a structural fact about where value now comes from.

This is why paying for a person's growing skill and knowledge matters more than it once did. When the environment is stable, you can pay for a job and expect the job to stay put. When the environment changes fast, the value sits in what people can do and keep learning to do, and the reward system has to recognize and reinforce that development rather than freeze pay to a static job description. The obsolescence of the bureaucratic model, with its job-based pay and its control from the top, follows from the same pressure.

A caution about reading individuals off the trend: there is a steady industry claiming that each new generation values fundamentally different rewards. Most of that work is of poor methodological quality. The differences among members of any generation are almost always larger than the differences between generations. The environment raises the stakes on skill and knowledge for the organization as a whole; it does not hand you a formula for what any particular person will find worth working for.

How to

1. Assess your industry's rate of knowledge obsolescence and competitive intensity before benchmarking any pay practice.
2. Tie the weight you place on skill and competency pay to how fast the capabilities you need are changing.
3. Revisit the assessment on a fixed cycle, because the environment that justified last year's design may have shifted.

Watch out for

• Copying pay practices from firms in a fundamentally different competitive environment.
• Treating globalization and capital-market pressure as uniform when their intensity varies sharply by function and geography.

Expectancy theory rests on a plain observation about people: they are proactive and future-oriented, and they put out effort when they believe the effort has a good chance of producing rewards they actually want. Pay for performance works as a motivator only when two things hold—performance can be measured, and valued amounts of pay can be tied to it. The connection a person perceives between behavior and reward is what is called line of sight.

A more accurate term would be line of influence. What matters is not merely that a reward exists somewhere downstream, but that people can see how their own behavior moves a performance measure that, in turn, drives what they get paid. Where that chain is visible, the organization tends to get more of the rewarded behavior. Where a behavior goes unrewarded, it tends to get less. The same logic runs in reverse and is easy to forget: whatever you don't pay for, you quietly discourage.

Structure decides how far people can see. In a functionally divided organization, most employees cannot trace a line from their work to the success of a product or a customer. Organizing around units focused on products and customers gives people a line of sight to the business itself—only then can they feel market-driven and feel their rewards tied to a business they can actually influence.

Line of sight is not automatic even when the design is sound. The reward has to be one the person values, or the clearest connection in the world motivates nothing. And a familiar design error erodes it: rewarding top managers on short-term profitability produces shortsighted behavior and buried strategic objectives. Clarity about the wrong measure is still clarity aimed at the wrong place.

How to

1. Choose performance measures employees can actually influence through their own effort.
2. Test comprehension: ask employees to describe how their daily behavior changes their payout.
3. Shorten the loop between behavior, measurement, and reward so the connection stays visible.

Watch out for

• Company-wide profit metrics that dilute individual line of sight to near zero.
• Assuming involvement in plan design isn't needed — participation strengthens the perceived connection.

A reward motivates only to the degree that its recipient wants it. This sounds too obvious to state, yet pay systems routinely fail on exactly this point—they offer something the designer assumes people value rather than something the people in front of them actually value. Money, recognition from a supervisor, career, interesting work, family time: individuals attach sharply different weights to each, and the strength of those preferences varies from person to person.

Several things shape what a given person cares about. Basic security has to be met before growth, esteem, and self-actualization come into play at all. Cultural and environmental conditioning matters, as do age and maturity. And needs shift with satisfaction—once a need is largely met, it tends to recede in importance, which is why a reward that motivated someone last year may barely register now.

The practical caution is against grand generalizations, particularly the popular claim that whole generations want fundamentally different rewards. Most of that work is methodologically weak. The variation within a group almost always dwarfs the variation between groups. What holds up is the individual reading: to reward excellence, you have to know what the person in front of you counts as valuable, because importance is the multiplier that turns a clear line of sight into actual effort. A reward no one wants, however cleanly tied to performance, moves nothing.

How to

1. Survey or segment employees to learn what rewards they actually value.
2. Offer flexible reward mixes rather than a single one-size incentive.
3. Match reward type to life stage and role, not just to pay grade.

Watch out for

• Assuming high earners are motivated by the same reward mix as early-career staff.
• Over-investing in cash when non-monetary rewards would carry more perceived importance for less cost.

Motivation is not a trait people carry into work; it is a state that reward systems either create or fail to create. Expectancy theory frames it simply: effort flows toward performance when a person believes the performance leads to rewards they value. Two conditions have to hold at once. The reward has to matter to the individual, and the person has to see how their behavior drives the measure that determines the reward. Neither alone is enough. A prized reward with no visible line of influence produces frustration; a crystal-clear line of sight to a reward no one wants produces nothing.

When both conditions hold, the reward system becomes one of the more powerful drivers of individual and organizational behavior available to a manager. Outstanding individuals warrant high rewards for two distinct reasons—they are worth more in market terms, and the rewards themselves motivate the performance that makes them worth more. The same logic extends beyond the individual: teams should be rewarded for their performance, and in many cases stock and company-wide bonuses should reach everyone, so the energy is aimed at results the organization actually needs.

The payoff is not motivation for its own sake. Effort directed at the right performance is how human capital, core competencies, and organizational capabilities turn into competitive advantage. Old systems built on jobs and merit pay fail here because they do a poor job of pointing effort anywhere strategic. The shift that matters is toward systems that attract the right mix of people and then motivate the specific excellence the business depends on—energy with a direction, not just energy.

How to

1. Build motivation by securing both a valued reward and a visible effort-reward link, never one alone.
2. Distinguish the pay decisions that drive motivation from those that only drive satisfaction.
3. Track effort and behavior change, not just payouts, to verify motivation is occurring.

Watch out for

• Confusing high reward satisfaction with high motivation — satisfied employees can still be unmotivated to perform.
• Assuming motivation translates to organizational performance without the right measures and capabilities in place.

People decide whether their pay is fair by looking sideways. A software engineer who earns a healthy salary can still feel underpaid the moment she learns a peer with similar skills earns more somewhere else. Reward satisfaction is that comparison rendered as a feeling: a favorable or unfavorable verdict reached not against some absolute standard but against what similar others receive. The verdict is relative, which is why raising someone's pay does not reliably raise their satisfaction, and why a modest wage in a low-paying market can feel generous.

The practical consequence is narrow but powerful. Satisfaction governs membership, not effort. A satisfied person is a person who stays; a dissatisfied one starts scanning the market and eventually leaves. It does not follow that a satisfied person works harder. Contentment with pay tells you almost nothing about how much someone will produce on a given afternoon. Treating satisfaction as a motivational lever confuses two different mechanisms, and organizations that try to buy performance through generosity usually end up buying only tenure.

Two things move the verdict. The first is where an organization positions its rewards against the market. Pay well relative to what comparable employers offer and the sideways glance tends to reassure rather than agitate. The second is how openly reward information travels. When people cannot see the real numbers, they fill the gap with assumptions, and those assumptions run pessimistic. Openness does not guarantee satisfaction, but secrecy nearly guarantees suspicion.

What this buys, when it works, is retention of the people worth retaining. That is the whole return on satisfaction, and it is enough. The mistake is expecting more from it than staying.

How to

1. Position pay levels competitively against the market employees actually compare themselves to.
2. Use transparency about how rewards are determined to shore up perceived fairness.
3. Target retention-critical talent when deciding where satisfaction investments matter most.

Watch out for

• Expecting pay-satisfaction investments to raise output — they lower turnover, not effort.
• Ignoring the reference group: satisfaction collapses when employees learn peers are paid more.

Pay a person for the job they hold and you tell them exactly one thing: keep doing that job. Pay them for what they can do, and the incentive changes direction entirely. Skill and knowledge development is the behavior that follows when a reward system rewards people rather than positions. Learn the next competency, master the adjacent skill, and your pay reflects it. The organization is buying capability, and capability is what people build in response.

The distinction matters because the old approach fails at precisely the point that now decides competitiveness. Job-based systems and merit pay, as Lawler argues, do an inadequate job of developing individuals. They anchor compensation to a slot on an organization chart, which rewards occupancy, not growth. A person can hold the same job for a decade and learn very little, and a job-based system will pay them faithfully the whole time. Nothing in the design pulls them toward new knowledge.

Person-based pay reverses the pull. When an organization rewards people for what they can do, Lawler writes, it develops not only valuable human capital but also new organizational capabilities and core competencies. The individual learns; the organization accumulates. Those two effects run together, because the competencies a company needs are assembled out of the skills its people acquire.

The payoff is not the training completed or the certificate earned. It is that skills the organization actually needs get developed, on purpose, by the people best placed to develop them. Human capital compounds into core competencies, and those competencies are what let a company do things its rivals cannot.

How to

1. Reward only skills and competencies tied to work the organization actually needs done.
2. Define a skill map linked to strategic capability, not to generic credentials.
3. Pair skill pay with real opportunity to apply the newly acquired skills.

Watch out for

• Paying for acquisition of skills the firm has no place to use, driving cost without value.
• Letting skill pay ratchet labor costs upward faster than the capability delivers returns.

The reward mix an organization offers does something before anyone is hired: it sorts the applicant pool. Highly variable, stock- and bonus-based compensation draws a different person than a salary-based program does. One kind of package attracts people comfortable betting on upside and company performance; the other attracts people who value predictability. Neither is superior in the abstract. The design question is whether the people a given mix attracts are the people the strategy needs.

This reframes attraction as more than volume. A generous, high-fixed-cost package can pull in a flood of applicants and still fail on two counts. It may draw the wrong people, whose values do not fit what the work requires, and it may commit the organization to higher fixed costs than its competitors carry, a disadvantage that outlasts any hiring win. The first step is not casting a wide net. It is defining what "right" means, which begins with the core competencies and organizational capabilities the strategy depends on.

Cash complicates the calculus in a useful way. Its value in the eyes of recipients is universally high, while benefits and perks often lose value in translation. Lawler notes that life insurance is frequently valued at less than it costs, especially by the young, while medical insurance, bought in bulk, can be worth more to an employee than it costs the organization. A reward mix built without regard to how recipients actually value its components can spend heavily and attract poorly.

Attraction, done well, is a filter tuned to fit. The organization is not trying to appeal to everyone. It is trying to appeal, specifically, to the talented and properly motivated people whose values match what it can offer.

How to

1. Specify the values and motivations of the talent you want before setting the reward mix, then design pay to signal those priorities (e.g., equity for risk-tolerant builders, security for stability-seekers).
2. Audit which reward features candidates actually cite when accepting or declining offers, and reweight your package toward the discriminating ones.
3. Communicate the full reward structure — including non-cash and contingent elements — in recruiting materials so self-selection begins before the interview.

Watch out for

• Chasing raw applicant volume as a success metric when what you need is fit-density in the pool.
• Copying a competitor's headline salary while ignoring the value-signals embedded in their total reward design.

The old bonds have broken. Layoffs, downsizing, and the loss of job security dissolved the loyalty that once kept people in place, and Lawler is blunt about what replaced it: every employee is now a free agent, just as every company is free to restructure. What holds a person now is not obligation but rewards that accurately reflect their market value. When compensation lags that value, human capital investors do not stay, and no appeal to history will keep them.

Retention worth pursuing is selective. The goal is not to keep everyone, which would mean paying to retain people the organization does not need. It is to keep the people whose skills, knowledge, and performance are critical to its capabilities and competencies. Indiscriminate retention is expensive and, worse, keeps the wrong people while doing nothing extra to hold the right ones.

Several forces feed it. Pay positioned well against the market makes leaving less tempting. Person-based pay ties compensation to developed skill, which raises the value of staying for exactly the people the organization most wants. And satisfaction, the sideways comparison to similar others, governs whether someone starts looking at all. The war for talent Lawler describes runs most intensely at the executive level, where a McKinsey study found three-quarters of corporate officers reporting insufficient talent to fill senior ranks, and where smaller companies armed with stock and upside now compete for people large corporations once won by default.

Retention has become a design problem rather than a cultural inheritance. The bond has to be built, deliberately, out of rewards, and aimed at the individuals the organization cannot afford to lose.

How to

1. Identify the roles and individuals tied to your core competencies, and concentrate retention rewards (skill-based pay, equity vesting, growth paths) on them.
2. Use person-based pay to make critical skills expensive to poach and cheap for you to retain internally.
3. Track regretted versus non-regretted turnover separately, and manage each with different tools rather than one blanket policy.

Watch out for

• Applying across-the-board retention bonuses that reward the mobile and complacent alike.
• Letting reward dissatisfaction accumulate silently among key people who won't renegotiate — they exit rather than complain.

Everything upstream is instrumental. Attracting the right people, retaining the ones who matter, developing skills the organization needs, motivating outstanding effort — these are not ends. They converge on one outcome: the development of core competencies and organizational capabilities, and the motivation to use them. That convergence is what shows up as superior financial and strategic performance, and it is the reason to bother with reward system design at all.

Lawler's central premise is that today's key sources of competitive advantage are human capital, core competencies, and organizational capabilities — not physical assets, not scale, not position. The old reward systems, built on jobs and merit pay, fail to contribute to those advantages because they do an inadequate job of developing and motivating either individuals or organizations. A company can run a technically sound job-based pay system and still starve the very capabilities that would let it win.

The shift the argument demands is toward rewards that do two things at once: attract and retain the right mix of individuals, and motivate excellent performance. Both are required. A workforce full of capable people who are not motivated to perform produces little, and a highly motivated workforce lacking the right competencies performs the wrong work energetically. Reward systems are among the few levers that pull on both at the same time.

Capabilities and competencies are what let an organization do what rivals cannot. They are built out of the skills of individual people and expressed through their motivated effort. A reward system that develops the first and unlocks the second is not a support function. It is a driver of the outcome the enterprise exists to achieve.

How to

1. Trace each reward practice to the specific competency or motivated behavior it is meant to produce, and cut practices that trace to neither.
2. Balance rewards that build capability (skill development, competency pay) with rewards that trigger effort (performance-contingent pay) so both feed the outcome.
3. Measure performance against capabilities rivals cannot easily imitate, not just against last quarter's financials.

Watch out for

• Optimizing intermediate metrics — engagement scores, retention rates — as ends in themselves while distinctive performance stalls.
• Rewarding capability accumulation without any pull to use it, producing a well-trained but underperforming workforce.

In sports, the best baseball, football, and basketball players earn forty or fifty times more than their less-well-paid teammates. Traditional salary ranges rarely let the best performer earn even 30 percent more than the least effective one. The gap holds a lesson about where value actually sits. In a conventional job, the best performer may not add much more value than the weakest, because the job caps what anyone can contribute. When you pay the person instead of the job, you pay for the skills, knowledge, and competencies the individual actually brings, and their market value, which can vary enormously.

The economics behind this have shifted underneath employers. Work moves to wherever the needed skills exist at the best price: electrical engineering to Israel, software development to India, Russia, and East Asia. What stays in more developed countries is highly skilled work or face-to-face service delivery. In both cases the organization is competing for talent rather than granting jobs to applicants. That is why CEOs, entertainers, sports figures, and technology experts can command extraordinary pay and negotiate personalized packages, and why agents now represent senior executives alongside athletes.

Paying for the person also drives skill development, because employees see a direct return on building their capabilities. That same logic cuts both ways. SAS built a benefits package that effectively locks employees in for the long term, while some consulting firms require individuals to sign contracts repaying training costs unless they stay a set period. When someone is in high demand, a hiring organization simply buys the employee out by covering what is owed. Human capital does not stay put on its own.

The harder part is not spending money but spending it well. Attracting and developing the right people at reasonable cost, and motivating them to perform in ways that increase value, is what separates a working system from an expensive one.

How to

1. Define a skill or competency block only if the organization can actually deploy it and would pay a premium for it in the market.
2. Build certification gates that verify demonstrated proficiency, not course completion or years served.
3. Set 'topping-out' rules and periodic recertification so pay tracks currently-valuable, not historical, capability.

Watch out for

• Runaway labor cost when everyone eventually certifies in every block regardless of whether the business needs that skill mix.
• Certifying credentials or training hours instead of applied competence, which decouples pay from real value.

The question is not whether to reward performance but how much of a person's pay to put at risk on it. Merit pay, the familiar approach, folds the reward into base salary through small annual increases. The problem is arithmetic: those increases are too modest to represent a meaningful share of the total package, so they cannot motivate the way they are meant to. For rewards to work as motivators, they have to be a significant portion of what a person takes home.

That is the case for variable pay. Bonuses, incentive pay, gainsharing, goalsharing, profit sharing, and stock can be sized large enough to matter, and they reset each period rather than compounding permanently into salary. Outstanding individuals should be highly rewarded because they are worth more and because the reward itself drives behavior. Teams should be rewarded for their performance too, and in many cases stock and bonuses for company performance belong in the hands of all employees, not just the executives at the top.

How you split the reward depends on how the work is structured. When people depend heavily on one another to produce results, individual incentives can pull against the cooperation the work requires, and team or organizational measures fit better. When the work is more separable, individual performance pay carries a cleaner signal. The design has to match the interdependence of the actual work, not a generic preference for one instrument over another.

The payoff, when the measures and the amounts are set correctly, is a reward system that becomes a powerful driver of both individual and organizational behavior, and a direct instrument for putting a strategic plan into practice.

How to

1. Match the payout unit to the level where performance is actually controllable—individual, team, or plant.
2. Choose metrics employees can influence and understand, and test whether they can articulate how to earn more.
3. Size the at-risk portion large enough to matter but not so large it drives risk-averse or gaming behavior.

Watch out for

• Individual incentives layered onto highly interdependent work, which rewards internal competition and starves collaboration.
• Profit-sharing pools so diluted that no individual believes their action moved the payout.

Where you set pay relative to the outside market is a decision about who walks in the door and who stays. Recognizing an employee's market value is the starting point, because in almost every situation the right approach is to pay individuals rather than jobs and to focus on what those individuals are worth elsewhere. That external comparison, not an internal grade, is what determines whether an offer competes.

The pressure on market position has intensified because organizations now compete for talent rather than simply select from applicants. The shift toward global capital markets and lower trade barriers created growth but also new competitors and more demanding investors. Institutional shareholders press management for exceptional returns, and that pressure runs straight into compensation decisions. During the 1990s, AT&T, Sears, IBM, General Motors, and Compaq Computers all ousted CEOs over poor financial performance, a sign of how sharply the stakes around talent and returns had risen.

Market position works on three fronts at once. It shapes attraction, because talented people compare offers against what they could earn elsewhere. It shapes retention, because someone paid below market has a standing reason to leave and someone paid at or above it has one less. And it shapes how satisfied people feel with their pay, since satisfaction is largely a matter of comparison.

The discipline is that spending large amounts is not the same as spending well. Money has to be placed where it actually attracts and holds the right people, which means knowing precisely which skills the market prizes and pricing those, rather than lifting everyone uniformly.

How to

1. Segment roles by criticality and skill scarcity, then set a distinct market posture for each segment.
2. Benchmark against the specific labor markets your key individuals could actually move to, not generic industry surveys.
3. Reconcile lead/match/lag decisions with your total-rewards story so pay position and non-cash value are read together.

Watch out for

• Benchmarking against too broad a market so critical scarce skills look adequately paid when competitors are poaching them.
• Assuming above-market pay guarantees satisfaction—perceived internal fairness can override external generosity.

Most organizations treat pay as a private matter, and the instinct is understandable, but secrecy has consequences the designers rarely intend. When people cannot see how pay is set, what the market data show, or how the system is administered, they fill the gap with guesses. Those guesses are usually wrong, and they tend to run in the direction that leaves people dissatisfied.

Satisfaction with pay is largely a matter of comparison. A person judges their own reward against what they believe others earn and against what they believe they are worth in the market. When the actual figures and the logic behind them stay hidden, the comparison runs on rumor rather than fact, and the system's fairness cannot be seen even when it is real. Openness lets the reasoning show, so that a well-designed structure can be recognized as well-designed.

The degree of openness is itself a design choice, ranging from full secrecy to communicating pay levels, market data, and the rules of administration. The right point on that range is not automatic. It depends on how well the underlying system can withstand scrutiny. A pay system built on defensible market comparisons and clear performance measures gains from being explained. One that cannot bear examination is not made sound by keeping it quiet; it is only protected from the moment its problems would otherwise surface.

How to

1. Separate what you disclose into three layers: the process and criteria (disclose fully), the ranges and market benchmarks (disclose broadly), and individual amounts (disclose per your legal and cultural readiness).
2. Publish the logic behind how raises and bonuses are decided before you ever consider revealing numbers.
3. Train managers to explain a given pay decision in the vocabulary of the published criteria, not vague reassurance.

Watch out for

• Announcing transparency before the underlying pay decisions are actually defensible — openness exposes inequities you have not fixed.
• Confusing openness with a one-time data dump; without ongoing explanation, disclosed numbers breed more questions than trust.

The most significant change in the relationship between employers and employees is a transfer of power. Employers once ran the relationship: people applied, were interviewed, were selected, and were assigned jobs. That arrangement rested on work that was simple and repetitive, where a production worker performed one narrow task and needed to understand little else.

That work is largely gone. The production worker now may run a programmable machine tool, do statistical process control, or handle scheduling and suppliers. More jobs have become knowledge work, which requires employees to be knowledgeable decision makers who understand their organization's business strategy, its work, and its customers. Someone cannot make good decisions about work they do not understand. This is the new logic of organizing: information, knowledge, power, and rewards moved down to the levels where the work actually happens.

Involvement is not a morale program layered on top of a reward system; it is a condition the reward system depends on. It even extends to how pay itself is designed and administered, with employees participating in the choices rather than receiving them from above. When people hold real information and real power over their work, they can see how their effort connects to results and to the rewards attached to those results.

That is where involvement earns its place. It strengthens the line of sight between what an individual does and what the organization pays for. Absent involvement, a performance-based scheme asks people to influence outcomes they neither understand nor control, and the connection the reward is meant to create never forms.

How to

1. Distribute all four elements together — information, knowledge, power, and rewards — since giving one without the others creates frustration rather than capability.
2. Bring employees into designing metrics and administration rules, not into approving individual awards.
3. Pair any new incentive with the business information employees need to see how their decisions move the numbers.

Watch out for

• Announcing involvement while withholding the financial or performance data employees would need to act intelligently — this reads as manipulation.
• Involving employees in design but reverting to top-down administration, which teaches them their input was cosmetic.