Pay-For-Performance versus Full Engagement
One of the great myths of compensation theory is that people work largely for money. Dangle a big enough carrot before employee noses, and productivity will skyrocket. Plus, varying the type of compensation by position should drive people to “self-sort” themselves into the right jobs for their skill sets. Hard-driving salespeople go for straight commission (pure pay-for-performance), while compliance officers opt for salary plus bonus.
It is clear anecdotally that pay-for-performance schemes underperform, and end up paying too much to generate the desired behavior. A recent working paper by three business school professors gathers a lot of the work done on this topic together, and make some broad conclusions that resonated with us here at Bovo-Tighe.
Our co-principal, David Tighe, even wrote up an article for it, posted now on ezinearticles.com
To summarize the authors’ conclusions, humans are not automatons. Psychological factors muck up the relationships between employees and their pay plans. Read the paper for the details, but here are much-simplified capsules on the three main psychological factors that affect pay plan success:
- Social comparisons: These blunt pay-for-performance by introducing envy, resentment, social “justice” and other emotional factors that skew the impact of pay-for-performance plans.
- Overconfidence: People take on more than they can manage, as they consistently over-estimate their ability to meet the goals of the pay plan. This leads to a break-down of the “self-sorting” impulse, and further resentment when goals are not reached.
- Loss Aversion: People will work very hard to earn enough money to “pay the rent” and all their other current obligations. Once that pressure is off, though, their emotional needs get more attention, and quality of worklife becomes as important as the pay plan.
Our take: Strong engagement solves these problems by improving the flow of information up and down the organization.
- Employees who have input on what sort of compensation works best, and a better understanding of why some people are paid what they are, suffer less from social comparison.
- People who have had frank discussions and assessments about their skill sets will overreach less.
- And a quality of worklife that meets expectations breeds more engaged workers, who work harder on corporate goals without complicated pay plans.
There is a lot more one could say on this topic. These few paragraphs only scratch the surface. We will explore this again in the future. Let us know what you think, in the meantime!