By Peter Cappelli

You’ve got to give it to HR: We come up with the best names for practices. “Peanut butter” raises have been in the news as the term for merit pay increases that try to spread the budget around across employees roughly equally. The story is that they are going away and that employers are now pushing for “chunky peanut butter” raises that greatly increase the variance in the size of payments between good and poor performers.  What does this signal, and why is it happening now?

This is certainly not a new idea. In my memory, it has never been the case that business employers, especially larger ones, want to spread merit budgets equally across employees. The issue is just how much difference they wanted to create in the ratio of employee contributions to pay.

It is probably true that in the now-fading memory of the COVID-19 pandemic when we were just trying to keep the lights on, many employers were not able to identify performance differences as easily, so it was simpler to give more equal pay increases to everyone. Organizations may also have been thinking that the crisis atmosphere of the pandemic was not a time to punish performers who were not doing so well with low raises in part because so many outside factors may have accounted for their low performance. But giving big raises to some people means giving smaller ones to many others.

The period of worrying about how management practices might hurt employee mental health seems increasingly to be in the rear-view mirror.  It’s easy to forget now, and we largely have, but in the late 2010s, there was a great deal of interest and actual effort to think more carefully about employee performance.  The complaint then was about performance appraisals because they were time-consuming and had a “tick-the-box” aspect, making them feel largely like a waste of time. The alternative, which my colleague Anna Tavis and I pushed, was to move away from the form-driven, once-a-year system and toward more continuous feedback. The pushback, though, was often from business leaders who thought it was essential to give employees numerical scores on their performance so that they could allocate pay based on those scores. It’s hard to know where we actually stand on that process now except that it there seems to be fewer end-of-the-year appraisals but not much more feedback.

What does this have to do with the apparent end of peanut butter raises, even if they never were really there, and the move toward the chunky model? It reflects the never-ending concern of business leaders that we are not doing enough to address poor performers and the view that we have to reward our best performers or they will leave.

Underpinning those views is the assumption that performance is just a motivational problem, that poor performing employees just don’t care enough to do a good job. That is at least a step up from the “A Player, B Player, C Player” model a generation ago, now arguing that some people are just good performers and some are bad, so get rid of the bad and hire the good. The further assumption is that carrots and sticks are the way to motivate poor performers in particular by hitting them with low pay.

It is true that there is a lot of variation in the performance of employees, and poor performance needs to be addressed. But there are two problems with the chunky model: First, the assumptions are wrong. Poor performance sometimes occurs because employees just aren’t motivated to do better. Management is in part responsible for dealing with performance problems, figuring out what is wrong and fixing it. Sometimes people need training to figure out how to do what needs to be done; sometimes life problems are holding down performance; and sometimes employees are just in the wrong position or have the wrong boss. The notion that we just leave poor performance to the end-of-the-year merit appraisal to fix performance is a huge and costly mistake, but that is where we seem to be.

The other problem is that employees are already stressed out after a year of continuous layoff threats, uncertainty about AI effects, and general conflict in the economy, so trying to get them to work harder by increasing the pressure on them not only burns them out faster but makes it such that they cannot get their work done even if they want to.  It’s not a good time for more carrots and sticks.

Peter Cappelli is the George W. Taylor professor of management and the director of The Center for Human Resources for The Wharton School.