C-Suite - Fixed Vs Performance Pay

There are not many articles which persuasively converse its message to readers and they contentedly accept it. One of the subject post credit crisis is the fat bonus received by C-Suite members. Many condemned them for the irresponsible actions and causing the great recession.

One such article appeared in HBR blog titled “Stop Paying Executives for Performance” by  Dan Cable and Freek Vermeulen February 23, 2016.

The writers have managed to convince everyone (other than C-Suite) that executives do not require performance bonus. I wish to bring out some sections herein (the link for the article is placed at the end of this post) which states why executives are paid for something they have to do:

First, the nature of their work is unsuited to performance-based pay. As the incoming Chief Executive of Deutsche Bank, John Cryan, recently said in an interview: “I have no idea why I was offered a contract with a bonus in it because I promise you I will not work any harder or any less hard in any year, in any day because someone is going to pay me more or less.”

Five points why it is not good is listed below:

1.      Contingent pay only works for routine tasks

Decades of strong evidence make it clear that large performance-related incentives work for routine tasks, but are detrimental when the tasks is not standard and requires creativity.

2.      Fixating on performance can weaken it

In work situations where learning is important, performance or outcome goals can have a deleterious effect on performance.

3.      Intrinsic motivation crowds out extrinsic motivation

The goal of contingent pay is to increase extrinsic motivation – but intrinsic motivation is fundamental to creativity and innovation.

4.      Contingent pay leads to cooking the books

When a large proportion of a person’s pay is based on variable financial incentives, those people are more likely to cheat.

5.      All measurement systems are flawed

 For a complex job such as senior management, it is simply not possible to precisely measure someone’s “actual” performance, given that it consists of many different stakeholders’ interests, tangible and tacit resources, and short- and long-term effects.

It is highly recommended that the article should be read for a better understanding of the non suitability of the performance based pay to top executives.

Link: https://hbr.org/2016/02/stop-paying-executives-for-performance