Performance Anxiety

Can pay-for-performance arrangements actually undermine people’s performance?

That’s the implication of a provocative post we caught recently on the Naked Capitalism blog, which cites some interesting research on the subject.

“Pay for performance has become virtually a religion in America,” Yves Smith wrote on the blog. “As a result, evidence that it doesn’t work as advertised is seldom heard in polite company.” On the rare occasions when pay-for-performance systems are criticized, Smith added, it is typically on the grounds that they “reward short-term risk-taking.”

Indeed, Peter Drucker worried about this very thing. “If return on investment or current profits are overemphasized,” Drucker wrote, then managers “will be misdirected towards slighting the future in favor of the present.”

But, as Smith indicated, there may be even “more fundamental issues” at play. The research from which she quotes, she said, “explains how performance-linked bonuses can be demotivating and lead employees to game the system rather than do their best work.

“Using money or other rewards is useful when the task at hand is tedious,” Smith added. “But perversely, these inducements are demotivating when the task is inherently interesting.”

[EXPAND More]Drucker raised a somewhat similar notion in his 1954 landmark, The Practice of Management, when he wrote that it can easily backfire if a company tries to provide extra compensation to employees whose output eclipses a set standard. “The good worker who can easily ‘beat the standard’ . . . will either feel that he has to keep his output down so as not to ‘put on the spot’ his less competent fellow-workers,” Drucker wrote, “or he will lose respect for a management that does not know better than to set so absurdly low a standard.”

What do you think: Is pay for performance a fundamentally flawed idea? [/EXPAND]