tag:blogger.com,1999:blog-1752771132348583018.post3356280381499994198..comments2024-03-28T19:34:35.805-05:00Comments on Managerial Econ: The Dark Side of Incentive Pay?Luke Froebhttp://www.blogger.com/profile/06832270922187297624noreply@blogger.comBlogger1125tag:blogger.com,1999:blog-1752771132348583018.post-87595981168968483882017-10-09T20:03:34.864-05:002017-10-09T20:03:34.864-05:00Incentive pay, especially in the financial sector,...Incentive pay, especially in the financial sector, is a relatively new phenomenon. Pay for performance started appearing in the 1980s in the financial sector and is now commonplace in most companies across all sectors and industries for executives as well as rank and file employees. <br /><br />Does incentive plans/pay for performance really work? Common belief is that if the incentive plan isn’t working, the problem is that the incentives need to be adjusted or it wasn’t implemented correctly, not that pay for performance doesn’t work. Over the long term, organizations spend considerable time and money trying to fine tune the behaviorist backed theory of pay for performance.<br /><br />Over the short term, yes, there is substantial evidence supporting incentives and performance increases, but over the long-term, doubts continue to grow over the effectiveness of incentive pay.<br /><br />One of the largest reviews of pay for performance was done by Richard Guzzo and colleagues, analyzing hundreds of comparisons from 98 studies. The review resulted in no significant effect overall of incentives on performance.<br /><br />What was found is that the greatest effect on productivity and performance was training and goal setting programs within organizations, far exceeding pay for performance.<br /><br />Other reasons on why incentive pay fails:<br />• Pay is not a motivator - W.Edward Deming’s finding that pay ranks 5th or 6th of concerns of managers and subordinates. <br />• Rewards ultimately punish - Herzberg’s findings that coercion and fear destroy motivation and create defiance and defensiveness. <br />• Rewards rupture relationships – rewards and incentive pay reduce possibilities of cooperation and relationships are often the casualties of the scramble for rewards<br />• Rewards ignore reasons – relying on incentives for performance improvement does not address underlying problems and meaningful change<br />• Rewards discourage risk taking – employees do precisely as they are asked to do to achieve the reward and creativity is stifled and discouraged<br />• Rewards undermine interest – in the long run, no artificial incentive can match the strength of intrinsic motivation, focus on intrinsic motivation and performance and productivity will improve<br /><br />References:<br /><br />https://www.ft.com/content/71590098-8029-11e7-a4ce-15b2513cb3ff<br /><br />https://www.minneapolisfed.org/research/economic-policy-papers/incentive-compensation-in-the-banking-industry-insights-from-economic-theory<br /><br />https://hbr.org/1993/09/why-incentive-plans-cannot-work<br />Anonymoushttps://www.blogger.com/profile/14054329075146162564noreply@blogger.com