Merit pay done right?

I've been reading through The Knowing-Doing Gap by Pfeffer & Sutton and their Hard Facts book as well. I'll give full reviews later, but for now I wanted to focus on their discussions of "merit pay." Basically, they're against it.

But that's because they think merit pay is mostly done in the wrong ways and for the wrong reasons. Managers and board members assume that employees are motivated primarily by financial incentives, that group performance is essentially the sum of individual performance, and that organizations can get accurate measures of performance. All of this thinking, Pfeffer & Sutton argue, is questionable, especially in an education setting.

They then quote from lots of research showing that individualized merit pay in general doesn't improve organizational performance and typically is abandoned in relatively short order in large part because employees don't like it (again, especially in an education setting).

That doesn't mean, however, that they are completely opposed to some forms of merit pay. There are three variations that they argue can be very useful. First, paying people extra to develop skills or receive training that has been shown to improve performance (such as a terminal degree). Second, paying people extra for extra work (such as summer projects for faculty). Third, paying bonuses to groups (especially at the entire organizational level) for superior performance. Here's an example from the Education World website regarding possible ways to develop effective merit pay structures in educational settings - http://www.educationworld.com/a_issues/issues/issues374c.shtml.

I should add that there is a growing body of evidence that individualized performance pay can make a difference in student performance if you can adequately respond to some of the concerns mentioned earlier. See, for example, the Department of Education Reform study on recent seemingly successful performance pay experiments in Little Rock - http://www.uark.edu/ua/der/Research/performance_pay_ar.html. Also note that even a pro-union, presidential candidate on the Left (Barak Obama) is saying some positive things about merit pay - http://www.phillyburbs.com/pb-dyn/news/103-07062007-1373611.html.

So what does all of this research mean for the types of compensation schemes that institutions such as JBU should probably follow?

1) It will depend on the nature of your university. Compensation needs to support and buttress institutional mission and philosophy, so many of the details will depend on what you're attempting to accomplish.

2) In general, a flatter pay scale that makes everyone feel as if they're part of the same "team" is helpful. Put most of your "operating budget" resources here. Pfeffer & Sutton laud institutions, for example, that eliminate most titles, rank, etc. for similar reasons.

3) You should still set aside significant resources for these various forms of merit pay. Summer grants for all types of faculty activities that improve institutional performance should be increased (if you don't have them already). Training programs that have been proven effective should be supported with additional pay and not just training stipends. And "bonus pay" for all employees when the institution as a whole hits particular goals should be set up.

All of this seems fairly straightforward, but I've yet to find an institution like ours that actually follows these three fundamental points (but if you know of one, please tell me). We tend either to try to mimic the 19th century German research model or the late 20th century Business model. Neither seems very appropriate for our types of institutions, but such is the force of tradition and culture?