February 25, 2016

5 Reasons to abolish pay-for-performance for top managers

In a new article in Harvard Business Review Dan Cable and Freek Vermeulen, both professors of organizational behavior and strategic management, argue for the complete abolishment of contingent pay for top managers. They offer the following 5 arguments:
  1. Contingent pay only works for routine tasks. Performance related pay is especially unfit for executives because their tasks are anything but routine. 
  2. Fixating on performance can weaken it. A focus on learning leads to better results than a focus on results. A strict focus on performance goals limits learning and innovation. 
  3. Performance related pay undermines intrinsic motivation. In top management role intrinsic is especially important for creativity and innovation.
  4. Contingent pay leads to cooking the books. Emphasizing performance goals leads managers to start to play the game of making it look like they have accomplished those goals. While that happens unethical behavior is more likely to happen. 
  5. All measurement systems are flawed. Performance related pay requires that you are able to measure whether results have been accomplished. Whichever measure you will choose, it will always be an imperfect quantification of what you expect of executives. Because of this their behavior will always be influenced in the wrong direction. 
Also the argument that attracting talent for top management jobs requires contingent pay is not valid according to the authors. In fact, it only helps you attract people with an extrinsic orientation ("I am going for money!"), while people with an intrinsic orientation are the ones who are needed.

I suggest you read the article, it contains some interesting examples and links to research. 

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