Critical Thinking Application 11-A

The Case for and against Pay-for-Performance Systems

If you want employees to perform at a higher level, you can motivate them to excel by tying their compensation to a particular performance index. After all, the way to influ- ence employees is through the wallet, right? According to Alfie Kohn, author of four books and professional busi- ness lecturer, this is not the case.1 Drawing from Frederick Herzbergs motivation theory, Kohn claims that financial incentives cannot motivate employees to improve their per- formance; however, the absence of financial incentives can create employee dissatisfaction or demotivation. For ex- ample, if your salary was cut, you would become frustrated and might seek another source of employment, but if you received a raise, you wouldnt improve your performance over the long haul. Sure, you might become exceptionally productive right before your evaluation for your yearly bo- nus or right after you received a raise, but not when look- ing at the big picture. At best, pay-for-performance (PFP) incentives motivate employees to temporarily alter their behavior; they do not encourage any lasting changed be- havior. In fact, once the reward is taken away, employees will revert back to their old patterns of behavior.

So, according to this argument, PFP incentives are generally ineffective, temporary employee bribes. Jump through these hoops and youll get this is the inevitable philosophy behind reward systems. Employees are reduced to mere objects controlled by the wiles of manipulative bosses. Surprisingly enough, a rewarding system is not much different from a punishing system; not receiving a reward has a similar effect to being punished. For every employee who wins (receives an award), there is an employee who loses (does not receive an award). With increased emphasis on self-managed work teams and qual- ity work circles, competition and hostility among work- ers over who secured the largest reward is the last thing a U.S. firm needs. Employees will abandon risk taking, in- novation, and creativitythe key ingredients for competi- tive advantagein an attempt to minimize challenges and maximize their personal wealth. In the worst-case scenario, employees will engage in unethical or illegal behavior just to finesse a greater payoff. Therefore, the emphasis shifts from employees excelling at their jobs to excelling at the incentive-winning game. Examples include Washington Mutual, Countrywide Mortgage, Lehman Brothers, and Bear Stearns. PFP incentives, Kohn argues, do not moti- vate employees to improve their performance; they moti- vate [them] to get rewards.

Charles M. Cummings, senior compensation consultant at William M. Mercer, Inc., has refuted Kohns blanket condemnation of incentive plans, citing that properly con- structed pay-for-performance systems can be successful.2 Cummings finds fault with Kohns premise that PFP sys- tems reduce employees to simple objects trying to take a bite off the golden carrot dangling in front of their noses. Such manipulative and highly ineffective systems are found only in hierarchical, traditional organizations and are not representative of the way PFP systems should be designed nor of the way these systems are now being built. Furthermore, in such a traditional organization, employ- ees are largely performing specialized tasks that do not directly affect the firms bottom line. Rather, they have to rely on their supervisors to integrate their tasks into a meaningful, profitable whole. Without a feeling of worth to the organization, it is little wonder that employees will lack intrinsic (inner) motivation and have to be bribed by their bosses to perform their meaningless jobs. Cummings suggests that more firms today are shifting to team-based PFP plans (e.g., profit sharing, gain sharing) rather than individualistic plans (e.g., the ill-fated merit pay), which Kohn describes in his argument. Team-based PFP plans not only help employees comprehend their significance to the organization as a whole but also provide the intrinsic motivation necessary for optimum job performance. (Par- ticipants in quality work circles, self-managed work teams, and the like will experience this intrinsic motivation be- cause they can see the fruits of their labors with results that hit the bottom line.)

Contrary to Alfie Kohns assumption, Cummings believes that most people have a need to have their achievements acknowledged by others. Because employ- ees are being respected for their accomplishments with a properly designed and implemented PFP system, they will generate goodwill and commitment toward the organiza- tion. These feelings are much different from the feelings of ill will that Kohn describes. A proper PFP system can be very successful in an organization and can attain a com- petitive advantage through loyal and motivated workers.3

Assignment Consider the preceding arguments and take a position. Do you agree with Kohn or Cummings? Are there situations in which the opposing position would ever apply? What does the latest research indicate regarding this question? Think of a real-life example to support the position you have taken. Kohn says employees will abandon risk taking with PFP. Is that necessarily true? What are some examples of high risk taking under a PFP system that was clearly not a good thing for the company in the long run?