Leonard Mlodinow writes in a recent article in Forbes about the paradox of Meritocracy.

..one can imagine a more realistic utopia, where people are treated fairly and are compensated according to their skills. A true meritocracy. But there is a lingering problem–How can we tell what a person is really worth?

In today’s economy where knowledge work has overtaken traditional physical work, there is no easy way to count the number of widgets being cranked out to measure worth. For a truly fair world, compensation should be directly tied to value-added. This concept compounds the problem even further because value of an enterprise is not the assets and ‘goodwill’ anymore, but a complex series of judgments made by investors regarding competitive ability, industry positioning, branding, etc. Unfair in some sense but very much real, especially in large businesses where direct contribution to ‘value’ is buried way deep under all the financial consolidations and investor hysteria that makes up the stock market ticker symbol.

So, how does one draw a relationship between an individual’s contribution to the enterprise and the corresponding value-added? One does not even try it! Mlodinov continues to point out that

In business, merit supposedly determines pay. But in fact, it’s often the other way around, with pay determining merit. In controlled studies in which people were assigned random tasks with random pay, psychologists discovered people behave as if the higher-paid individuals have superior ability. And they do so even if they know that the pay scale was arbitrary.

Although Mlodinov does not reach the obvious conclusion in his article, the inescapable message to knowledge workers is that they will be recognized for their pay-scale first and merit second. The incentive for advancement is tied to boosting their pay-scales and not necessarily on adding value to the business. And if the climb through pay scale ladders is slow at the current company, move to another for a ‘fresh start’. Or if the risk is worthwhile, participate in the open market yourself by turning into an independent consultant. We are conditioned to value the recommendation from a $500/hr consultant even though the same recommendation from a $50/hr employee has bounced around without gaining any traction.

The message for businesses is equally clear. To add the greatest value to the business we need a robust and fair mechanism to recognize and reward merit through a visible tie to company performance. The alternate is to try and add value with a mix of (a) pay-scale focussed, unmotivated employees, (b) new employees who have joined to get that pay-scale jump they could not in their old companies, and (c) high-priced, short-term consultants brought in to try and add value using the unmotivated employees mentioned above….or by bringing in even more high-priced, short-term consultants.

Businesses need a core of meritocracy in its Utopian sense, and that core can drive value-addition in the most efficient and sustained fashion.