The economic crisis has called into question the pay practices of some of the nation’s largest financial services companies. In particular, the Federal Reserve and other regulatory organizations have found that many of the bonus and incentive programs led executives to make decisions that not only contributed to the worst financial crisis since the Great Depression, but weren’t even in the best interests of the firms themselves. Yet, six months into a compensation review of the country’s 28 largest financial companies, the Fed has found that many of those plans are still in place.
Are we really surprised?
Companies have been obsessed with pay for performance for almost two decades. And like any obsession, it has clouded the judgment of executives and others, such as human resources professionals and consultants, who should know better.
The problem is that pay for performance is founded on a two faulty beliefs:
- If you reward something you get more of the behavior you want.
- If you punish something you get less of the behavior you don’t want.
Unfortunately for our misguided execs, study after study has demonstrated results that massively contradict this way of thinking. It’s hard to fault them entirely. Logically, one would think that incentives work. The science, however, has proven otherwise and has found:
- As long as the job involves only mechanical skills or rules-based tasks, incentives work as expected. The higher the incentive, the better the performance.
- But once the job calls for even rudimentary cognitive skill—some conceptual and/or creative thinking—a larger reward leads to poorer performance.
These results have been replicated over and over again by psychologists, sociologists, and economists . . . including those funded by that left-wing, socialist institution, the U.S. Federal Reserve. Even a recent study from McKinsey found that three noncash motivators—praise from immediate supervisors, attention from leaders, and a chance to direct projects—are at least as effective as the three most highly rated monetary ones.
Now, don’t misunderstand me. Money is a motivator. If you don’t pay people enough, they won’t be motivated to do the job.
Once you pay people enough, however, it is no longer a factor in motivating performance, especially in jobs that require basic cognitive, conceptual and creative skill . . . the majority of jobs in the U.S. economy.
Organizations must stop drinking the pay for performance Kool-Aid. Pay for performance, carrot and stick management, performance appraisal, time clocks, verbal and written warnings, and many other management and HR practices are outdated and just don’t work.
Instead, it’s time to equip managers with the tools to manage in the modern workplace and support them with HR programs and practices that encourage the right behavior. That’s about redefining what it is to manage and it’s about completely overhauling HR. More importantly, it’s founded on the notion that we stop treating people like cogs in a machine and start treating them like smart, creative, self-motivated people who want to at all times do their best.
That’s not just some feel good manifesto. It’s the fact-based, scientific reality required to be a high performing organization.