Financial Incentives May Not Motivate

August 29 2007 - Research by Jeffrey Pfeffer, Thomas D. Dee II professor of organizational behaviour at Stanford Graduate School of Business, published in The Conference Board Review and "What Were They Thinking?: Unconventional Wisdom About Management" (Harvard Business School Press) suggests that the common management practice of offering financial incentives as motivators can have the reverse effect.

Jeffrey Pfeffer said:

"Incentives should be used not to drive behavior but instead to provide recognition and to share the company's success with its employees. There are, unfortunately, few shortcuts in leadership-and using financial incentives to fix companies isn't one of them."

The study found that organizations increasingly have been using individual incentive pay with the intention of improving productivity and efficiency. It cites a salary survey by Hewitt Associates, the compensation and human resources consultancy, which found the percentage of companies offering at least one plan tying pay to performance rose from 51 per cent in 1991 to 77 per cent in 2003.

Jeffrey Pfeffer said organizations can be misguided if they use incentive pay based on the belief "that if employees were just compensated appropriately, virtually every organizational and management problem could be solved."

The report cites the author's own experience buying a car. When the salesman (paid by commission) was told he and his wife were not planning to make a purchase that afternoon he began ignoring them. They ended up buying from another dealership where more attentive salespeople "tried to build a customer-service culture and encourage dealer loyalty."

The author also cited the experience of city officials in Albuquerque who began paying garbage collection crews for eight hours of work irrespective of how long it took them to complete their routes in an attempt to cut overtime costs. Far from encouraging workers to finish the job quickly, some crews cut corners "missing pick-ups; speeding, which caused accidents; or driving to the dump with overloaded trucks, which led to fines".

Jeffrey Pfeffer also challenges the controversial practice of awarding stock option grants to top executives:

"There is evidence that the higher the option grants to senior executives, the more likely it is that their companies will have to subsequently restate their financial statements."

The author questions the common assumption that employees are motivated primarily by money and suggests that too much reliance has been placed on financial rewards. A supportive organizational culture can be just as important.

Jeffrey Pfeffer commented:

"You want rewards to be large enough to be noticed, and you want to use them to provide an occasion for celebration and recognition, to let the group come together and share successes and enjoy each other's companionship. But you certainly don't want to make the incentives so large that they begin to drive, and thereby distort, behavior."

"One can change a pay system or a set of financial rewards fairly quickly and easily. It is much harder to change organizational culture, people's mindsets and beliefs, their knowledge and skills, and how effectively they work and communicate with each other. Thus, financial incentives offer the mirage of a quick fix-and contemporary management seems to be enamored of that idea."

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What Were They Thinking?: Unconventional Wisdom About Management
by Jeffrey Pfeffer

Based on his popular column in Business 2.0, Jeffrey Pfeffer delivers wise and timely business commentary that challenges conventional wisdom while providing data and insights to help companies make smarter decisions. The book contains a series of short chapters filled with examples, data, and insights that challenge questionable assumptions and much conventional management wisdom. Each chapter also provides guidelines about how to think more deeply and intelligently about critical management issues. Covering topics ranging from managing people to leadership to measurement and strategy, it's good organizational advice, delivered by Dr. Pfeffer himself.
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