Killed by Carrots: the pay for performance myth

Posted April 13, 2011 in Latest News & Insights

According to a survey by ExecuNet, most CEO’s are clueless about what really motivates their senior (C-level) executives.  The top reason that gets senior people to stay is the ability to have input into decisions that affect the company (CEO’s thought that they liked their jobs).  Meanwhile, CEO’s thought that work/life balance wasn’t that important (it is) and money was (it isn’t).  And it’s this last assumption that I think most leaders make… we believe that people below us are primarily motivated by money.  The reality is that most of us just want to be paid fairly based on our performance… enough to take the issue of money off the table.  Which leads me to one of our worst “best” practices: “pay for performance”.

When I entered the work force in the late 80’s, “pay for performance” was a relatively novel concept. After a short stint in a corporate office where the only pay for performance opportunity was in the sales group, I jumped over to not-for-profit where the mantra was “work for nothing and do everything”.  I can honestly say that in each position I held I gave 100%… in fact, I burned out at 26 working 12 hour days, six days a week for $28,500… but I loved it.  I was learning a ton, had huge autonomy and could see the impact I was making.  When money became an issue it was at raise time and that was only if I felt my base salary wasn’t being adjusted to reflect my output as compared to others or the market. (And let’s face it, that’s what most of us do… you can be perfectly happy with your salary until you hear that Bob, which 10 years less experience and who’s a total pain in the butt, is making $500 less than you a year.  That’s going to make money the issue).

Fast forward to the late 90’s when I rejoined the private sector in a leadership consulting firm that was all about “pay for performance” on a highly leveraged model.  By then, this idea had become the “norm”, but – having been buffered in the not-for-profit world – it was all new to me.  The first year, I missed my bonus completely because I was building a new team and (like in many cases and part of the challenge) the targets were off the mark because we were venturing into the unknown.  My boss thanked me for my great contribution, felt that I was adding huge value to the team and showed me my newly tweaked bonus plan for the following year.  I didn’t really care about missing the bonus because my base salary was already more than I’d been making before (always a good tip to hire people from the not for profit world who are used to below market salaries!), plus I was learning a ton, had lots of autonomy and was working with amazing people.  I was lovin’ it.

The following year, we knocked the lights out of our budget and I got a giant bonus cheque… (which mostly went to Revenue Canada).  Needless to say, I liked that and felt that I’d earned it because I’d worked really hard (and besides, everyone else was earning in the same zone). 

The year after that was 9/11 and 40% of our sales funnel fell out over a 7 day period.  Although the team worked hard to recoup the numbers, it was a tall order.  (Spending money on training is hardly a priority when the world might be ending.) Needless to say, I didn’t get my bonus that year, but, unlike in the first year when it was all new to me, not getting paid for busting my butt to try and make things work really stung (prior to 9/11 we’d been exceeding our targets).  Adding to my frustration was the fact that I saw other people, who had been buffered by lower targets and different comp levers, unaffected (there’s that pesky ‘comparison other’ again).  I couldn’t control 9/11 and yet my compensation fell by 50% from the year prior because of it and others weren’t affected.

And here, for me, lies the rub.  Carrot motivation systems like bonuses appear to work really really well when you’re living the high life and achieving your results is a bit of a cake-walk.  The problems occur when you hit a really tough time – which usually happens as a result of forces beyond your control – and, even though you work harder than you ever have before, you get no recognition (financial or often otherwise) because most bonus programs are driven around topline or bottomline growth… not effort.

I personally found it interesting, as someone who isn’t motivated by money, how working in a “carrot and stick” environment made me become focused on money.  And I certainly wasn’t alone.  If I could add up the hours we spent discussing compensation plans and negotiating with staff, instead of getting out and selling our work… depressing.  I often wondered, if we’d just paid people fairly from the beginning (vs. trying to get them “under market” to manage our overheads and then pay them “over market” in the fat years – which frankly, created delusions of market –value for their skills) would we have had a happier workforce?  Probably.

So, here’s the thing… if you find yourself in a lot of conversations about money with your team and seeing morale plummet because of a bad year, look a little bit closer at the assumptions you’ve been making about what really motivates performance.  For more on this topic, check out this great summary of Dan Pink’s book “Drive” and think about how you can build a culture that motivates through the 3 principles outlined (autonomy, mastery and purpose) vs. carrot and stick methods.  Sadly, most of our organization’s have embedded the mythology of “pay for performance” deep into their systems… but, as we Gen X and Y leaders start to move up the ranks, let’s exercise some influence and revisit some of these fractured processes.  Afterall, that’s the best part of leadership.  To make things better.

Happy leading!


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