Time Magazine's recent issue on health had an amusing, but questionable, piece of research on money as the ultimate incentive. The report stated that "money can motivate us to do just about anything--and that apparently includes losing weight." The research was based on a study of a 16 week diet program with the goal of each participant shedding 16 pounds. A lottery arrangement provided that some of the volunteers who exceeded the goal would win a cash prize. Others were part of a deposit-contract arrangement in which they anted up their own cash with the winnings being split among those who did the best. Others had no prize on the line. At the end of 16 weeks, 53% of those in the cash-prize group reached the 16-lb goal. The group with no prize in the offing finished a distant last, with an 11% success rate.
That quirky, narrow study with highly selective participants, makes it possible to easily generalize to the conventional wisdom that we need to pay high salaries and bonuses to our top performers if we want to get the best organizational achievement. I've listened to that song and dance many, many times over my lifetime.
So I'm writing this article to puncture that balloon, recognizing that I'm treading on dangerous ground. Indeed, one of the most conventional pieces of work wisdom is that money is the prime motivator for employees and raises and bonuses are necessary to keep the best people. I've heard this from clients for years, and I heard more of this rationale floating out of the finance industry over the past year than I could stomach. It's nonsense.
In a previous post, I reported on research that was recently completed at the Center for Work-Life Policy in New York, comparing the priorities and values of Gen-Y and Gen-X. The research revealed definitively that flexible work arrangements and the opportunity to give back to society trump the sheer size of the pay package. The discussion by Sylvia Hewitt, President of the organization can be found here: Harvard Business Review.
But there's far better and more detailed research on financial incentives and their relationship to company performance. First, I need to point out that there's a lot of money in financial incentives. As Sutton and Pfeffer note, there are literally hordes of book entries on Amazon associated with the word incentive. People are clearly interested in reading and writing about compensation and incentives. There are also many, many large compensation consulting companies who make mega-bucks consulting in the financial compensation business. The underlying assumption is that money is what motivates people in the workplace, so you want to align behavior with organizational objectives. Their basic belief is that without effective monetary incentives people would do nothing.
But extensive research shows that people rarely have complete control over performance outcomes, that financial icentives can easily motivate the wrong behavior (the last year-and-a-half are prime examples of that bad behavior), that we think others are motivated by money, even if we think we are not, that incentive systems often attract the wrong kind of people, and that variable pay among individuals results in lower performance.
When work settings require even modest interdependence (just think of all the cross-functional and team demands for day, problem solving and decision-making, highly incentivized (read, "dispersed") pay systems consistently result in negative consequences and lower performance. This has been found to be true in professional sports, university faculty, technology firms and numerous other settings.
Pfeffer and Sutton quote numerous studies in support of the same conclusions. One, study by Siegel and Hambrick (2005), for example, studied 67 publicly traded firms and found that firms with great disparity between the best- and worst-paid executives in the top mangement team "had subsequently weaker financial performance (measured by total shareholder returns)."
So, to put it bluntly, the next time you read or hear that an organization has to pay hugely incentivized salaries and bonuses to its best performers and executives, or it won't be able to achieve its financial objectives, understand that you're reading or listening to pure unadulterated, self-aggrandizing bullshit. There are a lot of things that motivate people, but money is usually number 6, 7, or 8 among the 10 employee priorities. Furthermore, some of the things money does are very bad for the organization, for the nation, and for you and me.