Reward loyalty or performance?

All organizations reward members for loyalty. I am wondering whether this is the right strategy, particularly when loyalty is not accompanied by performance. Is retention such a high priority that organizations would like to keep people (even bad ones) at any expense? The answer may lie to a small extent in the realm of emotions. An employee who has stuck around for long with a company is likely to have a strong sense of affiliation to it, and is likely to serve the organization favourably in his decision making and performance (even if it isn't peak performance). It probably pays to have such people with you, rather than those who crib at every opportunity, and may jump ship any day. Secondly, and more importantly, rewarding loyal employees may also help to serve as a signal to good performers that hints at what their own future might be like. The question here is whether the signal may actually fail, if good performers begin to think that loyalty assumes precedence over performance.

My personal view on this is that only performance must be rewarded. Rewarding loyalty, purely as a symbolic measure is just going to be that - symbolic - and not greatly beneficial. Moreoever, rewarding performance is likely to increase loyalty of good performers, thereby leading to a virtuous cycle. Productivity in goverment offices gives us a hint of what happens in organizations that only look at loyalty at the expense of performance.

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Nirav, points out an interesting example of a reward system that combines loyalty and performance - stock options! You get them only if you stick around, and you reap the benefits only if your company does well (which indirectly means that you have to contribute to the cause).