In 2003, Harvard Business School professor Michael Beer wrote about why pay for performance doesn’t work after studying it in action at Hewlett-Packard. “The idea seems perfect. Managers want their employees to pull out all stops for Project X, for example. Employees, confident of their ability to reach if not surpass the goals, start banking on the extra money.”
This incentive-style of compensation has its pros and cons, certainly, and has been implemented in healthcare, education, the auto industry and professional sports. It continues to be used because employers of all kinds want to attract and motivate workers to accomplish specific objectives, while maintaining a level of expense scalability.
In a paper co-authored with Mark D. Cannon of Vanderbilt University, Promise and Peril in Implementing Pay-for-Performance: A Report on Thirteen Natural Experiments, scholars weigh in the potential downsides. “Other scholars have argued that the real problem is that incentives work too well. Specifically, they motivate people to focus excessively on doing what they need to do to gain rewards, sometimes at the expense of doing other things that would help the organization.”
While tempting to pay for a specific accomplishment, in reality pay-for-performance becomes incredibly complex to institute for several reasons. First, for many roles, like teachers, the desired outcome is too subjective. Second, in scant jobs is there a singular objective, and pay-for-performance, as pointed out by Beers, can cost the loss of other, non-incented objectives. Third, it can be counter-intuitive to the organization’s culture. Take two different shoe-related companies. At Zappos, customer service is the cornerstone. A p-4-p measure, driven by satisfaction scores, may be highly successful, whereas at Tom’s Shoes, where philanthropy is king, incentivizing just on top sales may send the wrong message to employees.
Ultimately, employers must consider a wide spectrum of motivational and pay tools to drive success, including non-monetary measures. In a webcast later this week, leaders from Pfizer, Abbott Labs and ADP discuss different options, including incenting for retention.