Management Training Tips:
Performance-related pay doesn't encourage performance
The clue ought to be in the name. Performance-related pay is pay
for performance, and the better performance you turn in and the
harder you work the more you will get to take home. Except,
management training academics are now suggesting, more often than
not the opposite may be the case.
New management training research by the London School of Economics
has argued that, far from encouraging people to strive to reach the
heights, performance-related pay often does the opposite and
encourages people to work less hard.
An analysis of 51 separate management training experimental studies
of financial incentives in employment relations found what the
school has described as "overwhelming evidence" that these
incentives could reduce an employee's natural inclination to
complete a task and derive pleasure from doing so. The findings are,
of course, deeply controversial, given the depths of anger still
felt by many over the role of performance-related pay in causing or
contributing to the current economic crisis.
"We find that financial incentives may indeed reduce intrinsic
motivation and diminish ethical or other reasons for complying with
workplace social norms such as fairness," argued Dr Bernd Irlenbusch,
from the LSE's Department of Management. "As a consequence, the
provision of incentives can result in a negative impact on overall
performance," he added.
Companies therefore needed to be aware that the provision of
performance-related pay could result in a net reduction of
motivation across a team or organization, he suggested.
Organizations also needed to be looking closely at how they designed
effective management training workplace incentives in the future.
The full management training research is due to be unveiled next
week at a round-table debate, and will include further research by
the school suggesting that extra incentives can lead high-ability
workers to form teams with similarly skilled colleagues rather than
workers they are socially connected to. Yet socially connected
workers tend to work together better and produce better results,
meaning that, as a consequence, increased incentives can even reduce
a firm's average productivity.
The LSE management training academics are by no means the only ones
questioning received wisdoms over executive and performance-related
pay at the moment. Harvard Business School's V G Narayanan , writing
in this month in the Harvard Business Review, has argued forcefully
that a wholesale rethink is needed on executive pay, not just
tinkering around the edges.
Narayanan, Thomas D Casserly Jr professor of business administration
at the school, has suggested that, rather than politicians or the
public asking how much should chief executives be paid (a question,
he argues, more born of jealousy than anything else), they should be
asking "how should they paid" and the less pithy but just as
important, "should changes in the way CEOs are paid be mandatory or
voluntary?".
"Pay must be structured to attract the right executives and give
executives effective incentives to lead their companies to great
performance," he agreed. "The poor showing of too many firms,
despite ample CEO salaries and equity packages, and excessive
compensation at times of poor performance shows that pay typically
isn't structured correctly and that executive compensation practices
need serious reform," he added.
All too often, executive incentives were (and still are) based
mostly on short-term financial metrics and shareholder returns.
Therefore, financial results tended to be the consequence of a
firm's management training strategy and implementation.
"Effective incentive systems should focus on effective
organizational learning and growth, process improvements, and
customer-related metrics and milestones," he advised. "In addition,
companies should design management training compensation packages to
attract the right people for implementing the company's strategy.
For instance, below market salaries coupled with aggressive
incentive pay linked to individual performance is likely to attract
self-motivated entrepreneurial individuals.
"Companies also need to assure their executives longer tenure and
horizons. A CEO who is afraid of being fired for not making
short-term financials will not focus on the long term.
"A board that is actively engaged in strategy formulation and
implementation and compensates a CEO for strategy implementation
milestones and monitoring long-term performance is more likely to
understand, appreciate, and encourage a CEO's efforts even if they
yield short-term financial results that are below expectations,"
emphasized Narayanan.
There was an urgent need for boards to evaluate their executives'
performance annually to determine their progress on long-term goals.
Simultaneously, boards needed to engage more in active succession
planning so they did not find themselves looking for a "superstar
CEO" to rescue them from financial problems.
"It is precisely in those situations that CEOs are able to negotiate
outrageous compensation packages," said Narayanan. "Simultaneously,
companies should get rid of egregious practices such as over the top
severance packages (more than two times annual compensation),
grossing up taxes, defined-benefits plans, guaranteed returns on
deferred compensation, accelerated vesting in the event of change in
control, and time-based vesting
of restricted stock," he added.
"It would be highly unfortunate if, as now seems possible, massive
amounts of regulation and active government intervention were to be
the dominant forces determining how American executives are
compensated," he suggested.
Initiatives such as caps on pay, shareholder "say on pay" and
ceilings on ratios of CEO pay to worker pay, appointment of a
"federal compensation Tsar" and labeling of incentive pay as pay
that causes excessive risk all simply reduced innovation and hurt
shareholders, he argued.
"Governmental and shareholder second-guessing on pay would create an
environment of fear in which no board would dare try an approach
that's different from the herds or that is tailored to the company's
particular strategy," said Narayanan. "While compensation reform is
needed, it must come from within--from management training, acting
in the company's best interests," he added.
Management-Issues columnist Bob Selden also highlighted the
limitations of performance-related pay back in January 2008. He
argued that performance-related pay, by running contrary to
teamwork, could ultimately damage organizational effectiveness and
the loss of expertise just when it is needed most.
"Many organizations today are looking to increase their bottom line
by paying their people to improve individual performance. For
instance, it is now quite common for a large percentage of a
person's salary (particularly senior managers) to be based on their
performance, with a smaller component made up of base salary," he
said.
"Why do organizations continue to throw money at performance issues?
If organizations were better managed and led, would there still be
the need to offer people incentives to perform?" he questioned.
In companies that were well-managed and where people were led really
well, enjoyment and engagement could become much more important
factors than simply salary or performance-related pay and bonuses,
he suggested.
Source:
http://www.management-issues.com/2009/6/25/research/performance-related-pay-doesnt-encourage-performance.asp
Subject: Management Training
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