Doesn’t pay-for-performance just seem like a great idea?
It is simple, basic behavioral psychology, right? A dog does what you want, you give them a bone. A person does what you want, you give them $100. Or some recognition, like Employee of the Month.
But, believe it or not, there have been dozens of scientific studies and several case studies that show that pay for performance doesn’t work. And it makes sense, when you really think about it.
Because what the real-life examples and the science reveals is that when someone does a task for a reward, it no longer becomes about the task anymore. It becomes about the reward. And that stunts creativity, destroys morale, has logistical issues and often causes people to act unethically.
What a pay-for-performance plan means is that people are given bonuses based off of particular tasks they accomplish. What it doesn’t mean is someone getting a raise, say, for their performance over the year (which is actually a better way to do it).
So, for example, say you have a factory that builds cars and one team is charged with building engines. A pay-for-performance model would be that if a team builds 100 engines in a week, each team member gets a $100 bonus.
In one study, James Gabarino, who now is president of the Erikson Institute for Advanced Studies in Child Development, had fifth-and-sixth-graders tutor younger children. Half of the tutors were given movie tickets if they tutored well, the other half were not rewarded.
What Gabarino found was that the tutors who were rewarded with the movie tickets were quicker to become frustrated with the children they were teaching and ultimately were worse at their jobs. What happened was the movie tickets became the focus of the tutors instead of the work itself.
Teresa Amabile, who is now a professor at Harvard Business School, has studied employee performance throughout her career. In 1985, she conducted a study that concluded that instilling reward-based thinking, the core philosophy of pay-for-performance, can actually hurt creativity.
In the study, she split 72 students who were interested in creative writing into three groups and had them write two poems each. Before writing the poem, one group filled out a questionnaire on the extrinsic reasons why they write (i.e. asking them the external rewards they hoped to get from writing, such as money).
The second group, before they wrote their poems, filled out a questionnaire asking them about the intrinsic reasons why they write (i.e. asking them about the joy they take from writing). The third group was given no questionnaire.
From that, 12 independent poets concluded that the writers who filled out the extrinsic questionnaire were substantially less creative than the other two groups. “If they feel that ‘this is something I have to get through to get the prize,’ they’re going to be less creative,” Amabile said.
There have been several scenarios where companies put in rewards for hitting certain goals and the results have not been good. Perhaps the most frequently cited example is Hewlett-Packard, which had 13 separate units follow a pay-for-performance model in the 1990s, only to have all 13 get rid of it within three years.
A good example of what went wrong was what happened at a HP unit in San Deigo. There, management created goals for all teams, with three possible levels of financial rewards.
The first few months went great. Most of the teams hit either the 2nd or 3rd level of the goals, meaning management was paying more in bonuses than it expected. To avoid that, management increased the goals, which lead to complaints.
Then, teamwork started breaking down, fingers began to be pointed and the overall morale of the company dropped. Additionally, management was constantly fiddling with the reward system or dealing with complaints, as opposed to managing employees.
After a few years, the San Diego unit got rid of the system, and everyone was happier for it. Again, it started well, but soon work became about the reward rather than taking pride in the work.
Additionally, in 2006, Merrill Lynch tied its executives’ pay with the stock of the company. What happened,according to the New York Times, was that executives took a short-term view of increasing stocks as quickly as they could, without weighing the long-term risks.
In 2008, during the financial crisis, Merrill Lynch lost $51.8 billion on mortgage-backed securities thanks to some of those big risks, according to Bloomberg. Additionally, the company faced threats from the New York Attorney General for allegedly misrepresenting the risk of those mortgage securities.
Ultimately, the company was sold to Bank of America. Some might counter that many financial companies crashed in 2008, but then again, many financial companies have pay-for-performance compensation plans
The Bottom Line
The fundamental problem with pay-to-performance models is that they put all the emphasis on achieving a goal set out by an employer for the sole sake of gaining the reward. But really, to have truly happy employees, it has to be about more than that.
A happy, creative employee ultimately isn’t motivated to do their job well because of a perk they might receive. They do their job well because they take pride in it and want to do a great job.
Obviously, at the end of the year, top performers will be rewarded with higher salaries. But the difference is the main motivation throughout the year to do everyday tasks isn’t some sort of reward, whether it be money or recognition. Instead, the main motivation is doing a great job.
That, naturally, starts with hiring people who really want to be there and take pride in their work. And it continues by avoiding gimmicky compensation plans and putting the emphasis on doing a great job, with the belief that everything else will fall into place.
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