Can pay-for-performance arrangements actually undermine people’s performance?
That’s the implication of a provocative post we caught recently on the Naked Capitalism blog, which cites some interesting research on the subject.
“Pay for performance has become virtually a religion in America,” Yves Smith wrote on the blog. “As a result, evidence that it doesn’t work as advertised is seldom heard in polite company.” On the rare occasions when pay-for-performance systems are criticized, Smith added, it is typically on the grounds that they “reward short-term risk-taking.”
Indeed, Peter Drucker worried about this very thing. “If return on investment or current profits are overemphasized,” Drucker wrote, then managers “will be misdirected towards slighting the future in favor of the present.”
But, as Smith indicated, there may be even “more fundamental issues” at play. The research from which she quotes, she said, “explains how performance-linked bonuses can be demotivating and lead employees to game the system rather than do their best work.
“Using money or other rewards is useful when the task at hand is tedious,” Smith added. “But perversely, these inducements are demotivating when the task is inherently interesting.”
What do you think: Is pay for performance a fundamentally flawed idea?
I don’t think pay-for-performance plans are fundamentally flawed, but they cannot be the only metric used to determine employee pay. The real challenge lies with the unintended consequence of employees making decisions that aren’t in alignment with organizational values to improve their personal performance, and the demotivational impact on high performing employees. Balance and reason must be applied to any pay plan.
Show me a pay for performance plan that can’t be gamed or that works for a majority of a companies workers and I’ll eat my shorts.
There’s a wealth of research in the fields of psychology and economics that says that giving monetary awards for tasks interferes with intrinsic motivation. In other words, the closer that money is tied to a task the more likely that it we’ll devalue the task.
One example of this is the “pizza for books” programs that have become popular in some school systems. Every time a student finishes a book, they get a coupon for pizza. While this is a way to get students who don’t read at all to read some books. What it really does is devalue reading and cause students to read less. Students who are exposed to such a practice are likely to read shorter easier books to game the system.
We have research going back 50 years that tells us that carrots and sticks don’t work, for whatever reason, business has not caught up with science.
Certainly, having all employees on the same page with organizational goals is important. That’s a culture issue. Most companies don’t have clear goals and values that the c suite and managers model every day. They have top down management structures that don’t encourage individual action. Companies like Southwest, Atlassian, SEMCO and Zappos have clear goals that help everyone stay in alignment. They push decisions out to the edge and let people take chances.
If the pay-for-performance plan only rewards an employee if they reach a set standard and nothing more, it seems like a double-edged sword.
On one hand, those who are tremendously gifted and can easily reach that standard may just do the minimum to get by. As such, they may not be encouraged to do all they can and reach their full potential.
On the other hand, it does establish is minimum acceptable standard that one may wish to communicate. If an employee can’t meet that standard, they would need to seek personal improvement.
Perhaps a more useful plan would be a tiered pay-for-performance plan. As you produce a minimum amount, you’re rewarded a minimum amount. But as you gain skills and are able to perform at a higher level, you would then be rewarded more.
Pay for performance is fundamental and a core principle. Businesses that perform can raise capital, Portfolio managers with good investment returns get paid more, Athletes that are better get paid more, etc.
Good students are rewarded with grades which are signals to employers about the individual (effort, intelluct, drive, etc.) hence the better ones get paid more.
The crticism of petty examples “Pizza for Books” or getting rewarded as best employee of the month miss the point and “performance rewards” should be items we reinforce. These are precursors for what management is looking for and getting employees to stretch and perform.
Those teams that practice really hard and come together as a unit generally out perform those that fall into the dis-order and practice less.
Dan Pink has a great presentation on TED that reinforces these thoughts.
Yves Smith is a woman.