Break the Link Between Pay and Motivation

An experiment in eliminating a pay-for-performance model bolstered sales force results, retention, and engagement at Hilti Group.

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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.1

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.

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.2 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.

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References

1. A.D. Stajkovic and F. Luthans, “Behavioral Management and Task Performance in Organizations: Conceptual Background, Meta-Analysis, and Test of Alternative Models,” Personnel Psychology 56, no. 1 (March 2003): 155-194; and J. Hope and R. Fraser, “New Ways of Setting Rewards: The Beyond Budgeting Model,” California Management Review 45, no. 4 (summer 2003): 108.

2. E.L. Deci, “Paying People Doesn’t Always Work the Way You Expect It To,” Human Resource Management 12, no. 2 (summer 1973): 28-32; J. Pfeffer, “Six Dangerous Myths About Pay,” Harvard Business Review 76, no. 3 (May-June 1998): 109-119; A. Kohn, “Why Incentive Plans Cannot Work,” Harvard Business Review 71, no. 5 (September-October 1993): 54-63; and D.H. Pink, “A Radical Prescription for Sales,” Harvard Business Review 90, no. 7-8 (July-August 2012): 76-77.

3. A. Weibel, M. Wiemann, and M. Osterloh, “A Behavioral Economics Perspective on the Overjustification Effect: Crowding-In and Crowding-Out of Intrinsic Motivation,” in “The Oxford Handbook of Work Engagement, Motivation, and Self-Determination Theory,” ed. M. Gagné (Oxford, England: Oxford University Press, 2014), 72-84; and G.D. Jenkins Jr., A. Mitra, N. Gupta, et al., “Are Financial Incentives Related to Performance? A Meta-Analytic Review of Empirical Research,” Journal of Applied Psychology 83, no. 5 (May 1998): 777-787.

4. F. Ederer and M. Gustavo, “Is Pay for Performance Detrimental to Innovation?” Management Science 59, no. 7 (February 2013): 1496-1513; and T.M. Amabile, R. Conti, H. Coon, et al., “Assessing the Work Environment for Creativity,” Academy of Management Journal 39, no. 5 (November 1996): 1154-1184.

5. Hope and Fraser, “New Ways of Setting Rewards,” 113.

i. M.C. Jensen and W.H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,” Journal of Financial Economics 3, no. 4 (October 1976): 305-360.

ii. Kohn, “Why Incentive Plans Cannot Work,” 54-63.

iii. C.P. Cerasoli, J.M. Nicklin, and M.T. Ford, “Intrinsic Motivation and Extrinsic Incentives Jointly Predict Performance: A 40-Year Meta-Analysis,” Psychological Bulletin 140, no. 4 (July 2014): 980-1008.

iv. E.L. Deci and R.M. Ryan, “The Importance of Universal Psychological Needs for Understanding Motivation in the Workplace,” in “The Oxford Handbook of Work Motivation, Engagement, and Self-Determination Theory,” ed. M. Gagné (Oxford, England: Oxford University Press, 2014), 13-32.

Acknowledgments

The authors thank Felix Hess and Sabine Krauss from Hilti and Antoinette Weibel from the University of St. Gallen for their extraordinary support of this project.

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