Learned a lot lending an editorial hand here:
MIT Sloan Management Review, April 20, 2022
by Jonas Solbach, Klaus Möller, and Franz Wirnsperger
Neil Webb/theispot.com
Pay-for-performance (PFP) compensation systems were invented in the industrial age to drive individual performance — and despite research showing that this approach is ill suited to much of the knowledge work performed in organizations today, the practice persists as the norm.
Compensation systems remain stuck in the past for several reasons. The first is, essentially, inertia: Companies have been using PFP for decades, and the best practices disseminated by compensation consultants usually derive from it. Additionally, most leaders are either not aware of the research on PFP or dismiss it as unreliable. Finally, leaving PFP behind and taking the leap required to design and implement a new compensation system can be a fearful prospect, given the potential impact on performance and results as a consequence of getting it wrong.
However, organizations may have more to lose by failing to move beyond PFP. We conducted a large-scale experiment with a target-independent compensation system. The results point to a strong business case for leaving PFP behind.
However, organizations may have more to lose by failing to move beyond PFP. We conducted a large-scale experiment with a target-independent compensation system. The results point to a strong business case for leaving PFP behind.
The Dysfunctional Elements of PFP
For the past 50 years, academics such as Edward L. Deci and Jeffrey Pfeffer, and pundits such as Alfie Kohn and Daniel H. Pink, have been arguing that PFP is inherently dysfunctional. This stems from two primary sources.
First, PFP is focused on narrowly defined outcomes, such as the number of sales closed, but it ignores the ways in which those outcomes are produced. This introduces the possibility that chance — or, worse, unethical behavior — will be rewarded and that the quest to achieve the promised reward will undermine other desirable behaviors, such as teamwork and collaboration.
Second, PFP provides the extrinsic motivation of financial reward, but it ignores powerful and beneficial intrinsic motivators, such as the joy of the task itself, a sense of contributing and belonging to a team, and personal development. (See “Shifting Thinking on Motivation and Compensation.”) Financial rewards prompt employees to pursue specific targets and avoid activities that do not lead directly to achieving those goals. PFP suppresses intrinsic motivation, leading at best to compliance — and it fails to nurture an enduring employee commitment to or identification with the company. In the long run, this lowers overall performance.
For all of the dysfunctions it can generate, PFP has its uses. It can drive superior performance when jobs offer little or no opportunity for intrinsic motivation. When jobs are monotonously simple or volume-driven, extrinsic motivation provides a focal point for employee effort and behavior. But PFP undermines the performance of work that requires people to explore complex problems, develop creative solutions, and achieve qualitative results that cannot be fully specified in advance. Moreover, when performance targets become obsolete, such as when production lines shut down and sales crashed during the initial round of COVID-19 lockdowns, PFP loses its motivational power because it cannot deliver the rewards that it promised.
For the past 50 years, academics such as Edward L. Deci and Jeffrey Pfeffer, and pundits such as Alfie Kohn and Daniel H. Pink, have been arguing that PFP is inherently dysfunctional. This stems from two primary sources.
First, PFP is focused on narrowly defined outcomes, such as the number of sales closed, but it ignores the ways in which those outcomes are produced. This introduces the possibility that chance — or, worse, unethical behavior — will be rewarded and that the quest to achieve the promised reward will undermine other desirable behaviors, such as teamwork and collaboration.
Second, PFP provides the extrinsic motivation of financial reward, but it ignores powerful and beneficial intrinsic motivators, such as the joy of the task itself, a sense of contributing and belonging to a team, and personal development. (See “Shifting Thinking on Motivation and Compensation.”) Financial rewards prompt employees to pursue specific targets and avoid activities that do not lead directly to achieving those goals. PFP suppresses intrinsic motivation, leading at best to compliance — and it fails to nurture an enduring employee commitment to or identification with the company. In the long run, this lowers overall performance.
For all of the dysfunctions it can generate, PFP has its uses. It can drive superior performance when jobs offer little or no opportunity for intrinsic motivation. When jobs are monotonously simple or volume-driven, extrinsic motivation provides a focal point for employee effort and behavior. But PFP undermines the performance of work that requires people to explore complex problems, develop creative solutions, and achieve qualitative results that cannot be fully specified in advance. Moreover, when performance targets become obsolete, such as when production lines shut down and sales crashed during the initial round of COVID-19 lockdowns, PFP loses its motivational power because it cannot deliver the rewards that it promised.
Seeking Alternatives to Pay-for-Performance at Hilti
Leaders at Liechtenstein-based Hilti Group, which offers products and services to the construction industry, have had their own misgivings about the effectiveness of PFP and whether its focus on individual performance is out of step with the company’s collaborative culture. Read the rest here.
Leaders at Liechtenstein-based Hilti Group, which offers products and services to the construction industry, have had their own misgivings about the effectiveness of PFP and whether its focus on individual performance is out of step with the company’s collaborative culture. Read the rest here.
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