We’ve talked about this since the financial meltdown. Now it’s time to do it: Unlink pay from performance. The evidence keeps growing that pay for performance is ineffective. It also may induce executives to take company-killing risks. There are other ways to motivate employees that yield better results at lower cost.Thanks mainly to provisions linked to performance, CEO compensation has skyrocketed in recent decades, while its correlation with actual corporate performance has remained as weak as ever. This has been most true in the U.S., where among the S&P 500 the ratio of average CEO pay to average employee salary went from about 40:1 in the 1970s to 325:1 in 2010. The ratio isn’t as extreme in most other countries, but the trend is the same. Below the top level, mismatches between pay and performance aren’t so acute. But all variable-pay-for-performance schemes still suffer from four inescapable flaws:
Hey, I'm all for merit pay if I get treated the same way as Jeff Immelt. What do you say, Merit Pay Fairy?1. In a modern economy, where new challenges emerge constantly, it’s impossible to determine the tasks that will need to be done in the future precisely enough for variable pay for performance to work well.2. People subject to variable pay for performance don’t passively accept the criteria. They spend a lot of time and energy trying to manipulate the criteria in their favor, helped by the fact that they often know the specifics of their work better than their superiors do.3. Variable pay for performance often leads employees to focus exclusively on areas covered by the criteria and neglect other important tasks. This is known as the “multiple tasking” problem.4. Variable pay for performance tends to crowd out intrinsic motivation and thus the joy of fulfilling work. Such motivation is of great importance to business, because it supports innovation and encourages beyond-the-ordinary contributions.The idea that people work only for money has been thrown overboard by leading scholars. Research has shown that human beings are not interested solely in material gain. They care for the well-being of other individuals and value recognition from coworkers. Many employees apply themselves because they find their work challenging and worthwhile. These nonmaterial motivations point to better ways to get results from the members of an organization.
Dem CEOs is always askin' me to wave my wand!