How Much Does Pay Matter?

Numerous studies have attempted to find a clear link between pay practices and performance, but have largely failed. In Good to Great, Jim Collins said his team “found no systematic pattern linking executive compensation to the process of going from good to great.”

There was no indication, for instance, that bonuses or stock options were more widely used by the good-to~great companies. Moreover, Collins found that the executives who lead the good-to-great transition actually received slightly less total cash compensation than their counterparts at comparison companies.

Pfeffer and Sutton come to a similar conclusion about most efforts to boost performance by creating pay incentives:

There is, in fact, little evidence that equity incentives of any kind, including stock options, enhance organizational performance. One review of more than 220 studies concluded that equity ownership had no consistent effect on financial performance. Another massive study and review of research on executive compensation published by the National Bureau of Economic Research reported that most schemes designed to align3 managerial and shareholder interests failed to do so.

It’s not that people don’t respond to financial incentives. They clearly do. When you pay salespeople commissions based on their sales, for instance, they will always sell more than when you simply pay them a flat salary. The same goes for an individual crafts person who gets paid on a per piece basis.

The Journal’s Jon Auerbach captured the kind of supercharged environment that pay incentives can create in a profile of a salesman for EMC Corp. named John Chatwin in 1998. At the time, the company paid salespeople about 65% of their total pay in commissions, and put no cap on the commissions they could earn.

The story begins with Chatwin, an ex4 college hockey player, fearing he won’t make his sales target for the quarter. To ensure that doesn’t happen, he shifts into overdrive, calling clients while ferrying relatives to his son’s christening, and breaking away from a family barbecue to contacta customer about a deal. “I may not be brilliant,” Chatwin told Auerbach, “but I’m hungry, I’m scrappy.”

The problem, however, is that most jobs today aren’t like Chatwin’s, where performance depends largely on individual effort and can be easily measured. Today’s jobs generally involve team work. Success is less due to an individual’s effort, and measurement of individual effort becomes more complex, if not impossible. In these situations, pay for performance can often seem unfair and arbitrary, and the result can demotivate, rather than motivate, employees. Resentment can fester, and significant time and energy can be wasted by people trying to get personal credit rather than working for team success.

The bottom line is this; Incentive pay is an effective tool in situations where performance can be fairly measured and where it is based largely on individual effort. But it is less effective in situations 一 common in today’s workplace — where the measurements are highly subjective and the work is done by teams.