Steven's Blog

Incentive Pay Doesn’t Work

If I offered you more money for results, would you change anything that you are doing now?

I have asked this very question to numerous successful CEOs, and invariably the answer is no. I suspect yours is as well.

If you are reading this, chances are that you are an intelligent, successful business leader trying to learn as much as you can so you can achieve the best possible outcomes for your business. So, if you wouldn’t change what you are doing for more money, why would you think that people like you, that is to say the best on your staff, would change what they’re doing for more money?

Excellence is not an economic behavior. It is a personal value. You do not change people’s personal values by offering more money or threatening to take money away. People who strive for excellence do so because it is who they are. It is how they believe they should live their lives. When I ask these same CEOs if they would ever deliberately perform less than their best for any reason, most respond that they wouldn’t even know how.

What about the people on staff who are not the best?

Do you really believe that mediocre performers actually have a Ferrari engine under the hood, but just don’t apply the gas unless incentivized with more money, and that if you offered to pay them more, somehow the inner Ferrari will just leap out?

Most CEOs concede it is unlikely that money holds the mediocre back. It’s something else, and that something is unlikely resolvable with incentive pay.

For example, the CEO of a company here in Japan decided to offer a 10% salary bump to managers who could score a certain level on an English competency exam. The result? No behavior change and no improvement in performance.

Those who had been learning English on their own before the policy, changed nothing in their behavior, scored well, and took the free pay raise. Those who had never been interested in learning English in the first place figured it wasn’t worth the money to start now and did nothing different.

If you think the result of the policy was simply lack of effect, you would be wrong. The company is actually worse off. Not only did it provide an unnecessary pay hike to some, those who decided to forgo the economic reward now feel morally justified in their aversion to English. After all, they have struck a fair economic bargain with their employer. Whereas before there had been a legitimate moral imperative for all managers to learn English, now the leadership can no longer make such a claim. It’s just an economic transaction, and a deal is a deal.

Sales people too strike a similar economic bargain when offered incentive pay. Some studies have shown sales, in fact, decline when incentive-based systems are implemented in businesses where before none existed.

So how do you incentivize people? You don’t.

People incentivize themselves or not at all. Click To Tweet

Excellence is not rheostat that people twist up or down. It is a switch that is either on or off. All you can do is hire people who value excellence, support them, show them the path and then get out of their way.

So put your checkbook away.

One thought on “Incentive Pay Doesn’t Work

  1. I agree about excellent performers doing great things regardless of bonus incentives. However, in global markets where career mobility across companies is much greater than in Japan, pay and bonus does significantly impact whether excellent people will stay or leave for better personal opportunities over the long term. So a good distinction to make is that in global markets, it takes more than “loyalty” to attract and retain key talent.

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