Questioning Performance Pay

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2 Responses

  1. Michael Dorff says:

    Really thoughtful post, Kelli. I agree with much of what you said, and my alternative solution (for companies that won’t abandon performance pay) takes a similar tack to yours. That is, I argue for cash bonuses tied to a large number of corporate metrics that are each subject to heavy influence by the CEO and that each matter to corporate results. I also argue that no one of these should account for a very large percentage of the total bonus. As you and some others have rightly pointed out, what the econometric data really shows is that the current forms of performance pay don’t work well. We have to turn to the psychology studies for evidence that even well-designed performance pay won’t work. I’m inclined to trust those studies, rather than our intuitions about how people are motivated, but reasonable people could certainly differ. That’s one of the reasons I devote most of a chapter to working out and demonstrating an alternative performance pay mechanism. In terms of stock-based pay, a lot depends on how much influence you think CEOs have, even after accounting for environmental and industry-specific variables. That still leaves a lot of room for company-specific factors, and these still probably contribute a lot more to the variance in corporate performance than the CEO does. I’m generally suspicious of the sort of bottom line metrics that assume the CEO is in total control. I strongly prefer much narrower metrics that the CEO is more likely to influence in a clear, direct way. I’m also favorably inclined toward giving directors more post-facto discretion in setting pay, as you advocate, but folks more worried about agency costs than I am are generally hostile to the idea. (U.S. tax law is also, at the moment, allowing the board to exercise discretion only to reduce performance awards, not to increase them.) (BTW, the book title may not hold; my editor and I are still playing around with different ideas.) Thanks so much for blogging about the book!

  2. Mostly monetary incentives are what make employers get motivated with work. However,treating them well and hearing them out means a lot to them. You can also encourage them to perform better by giving accurate feedbacks about how they do things. Appreciate them if they deserve it and guide and correct them if they fail. Good employee-employer relationship is still the best.