Why performance-based pay could be good for all

It's fair compensation for a worker's contribution to the company

A striking 5.2 per cent rise in US household income last year, the largest increase since the last recession, is a rare bit of good news for the beleaguered American middle class. Still, we shouldn't get too excited. That one-year improvement can't compensate for the decades of near stagnation in middle-class welfare. The Federal Reserve figures that the average income of the bottom 95 per cent of US households grew by less than 10 per cent, in real terms, between 1989 and 2013.

There's no shortage of suggestions for how to address the problem, from adjusting tax rates to hiking the minimum wage to tearing up trade agreements. One possible solution that hasn't been discussed much derives from a very capitalist concept: performance-based pay.

The US is an overwhelmingly private economy, and the government can only do so much to relieve inequality. That means the shareholders and CEOs of corporate America are ultimately responsible for strengthening the middle class. Yet in recent years, we've witnessed just the opposite. As capitalists binge on gargantuan bonuses and lavish share buybacks, they've been treating the employees who slave away for them as little more than costs to be controlled, leaving the average worker with crumbs.

Somehow the seemingly irreconcilable differences between capital and labour have to be reconciled. Few principles are more central to the American free-enterprise system than the right of hard-working people to reap the fruits of their labour. By applying this ideal on a much wider scale we can start to address the yawning income gap in a business-friendly way by aligning the interests of shareholders, management and workers.

To be sure, there's a fair bit of criticism of performance-based pay schemes, including bonuses and commissions. Studies show that financial incentives don't necessarily make people work harder or better over the long term. Those who can't compete may get left further behind.

We should, though, see performance-based pay not as a bribe for good behaviour or a motivational tool, but as fair compensation for a worker's critical contribution to the greater corporation. We reward CEOs based on a company's overall performance - its profitability, its share price and so on - so why not every employee?

According to consulting firm PayScale, senior management benefits much more from bonuses than the rank and file. In its most recent corporate survey, respondents said that 75 per cent of directors and managers were given bonuses, while only 47 per cent of eligible workers were. (And that's excluding other employees who don't even qualify for bonuses at these companies, so the actual percentage is likely even lower.)

Such schemes should be extended to all employees, from the CEO to the janitor. Hourly-wage workers ought to be included as well.

© Bloomberg