Pay-For-Performance: Use And Abuse
Pay for performance is the mainstay of many compensation systems. Logically, it’s correct to pay the most to those who contribute the most to an organisation’s results. However, various banking and corporate scandals arising out of abuses and/or excessive risk-taking by highly paid executives suggest that this system has engendered a “culture of greed”. Is “performance-related pay” really the way to go? This article looks at why it might not be.
Let’s get one thing straight at the outset:
performance-related pay, or pay-for-results, is not a new concept. Since the
beginning of time, kings have rewarded subjects with gifts of land, money,
chattels and titles for acts of “loyalty” or meritorious service. It wasn’t long before people realised that
they could “game the system” by (say) accusing their rivals of treachery, or
“faking” results. So what one often sees
is:
1.
People “game the system” EITHER:
·
To gain an (unfair) advantage OR
·
To avoid a loss or penalty
We’ve probably all done it sometime
or another. My experience has been
“fudging results” where measures aren’t particularly clear or can be
interpreted in different ways. This has
been going on for ages. Look at the
abuses of the old-style communist “5 year plans” (and before) where factories
always met (but interestingly didn’t exceed) their quotas.
2.
Blinded by their focus on their reward, people lose
sight of their responsibilities to other “stakeholders”, e.g.:
·
Staff
·
Customers
·
Shareholders
·
Communities
·
Regulators
Incentivising
performance through financial reward is a sound idea, but if it means that one
section of society is disadvantaged, does that really merit a reward? The excessive and irresponsible risk-taking
with “other people’s money” has led to businesses and banks being forced out of
business, ruining people financially and economically. This failure to recognise responsibility
takes no account of distortions and potential unethical behaviour to secure
payments. People become focussed on the
money, not on the outcome.
3.
Management/shareholders may encourage poor
behaviour by taking no action as long as the “good news” keeps coming in. Do you really
want to kill the proverbial “goose that lays the golden eggs” by enquiring
too closely into whether results that are too good to be true really are?
How many
businesses have been brought down because someone didn’t check closely on what
was really happening?
4.
Sometimes technology, sophisticated
products/services or lack of expertise on the part of the supervisor may disguise
the fact that something isn’t right. “It
takes one to know one” is a well-used phrase meaning that quite often only an
expert will recognise a crooked act.
5.
Sycophancy or a “herd mentality” may also be to
blame. If the head of a business or team
has sufficient force of character, people are often too willing to see things
“their way”, or not to question whether things are really as good as they’re
made out to be.
It took a
young child to point out to that “the emperor’s new clothes” didn’t exist and
that the emperor had been the victim of a pair of con artists. Everyone could see it, but no one wanted to
admit that, perhaps, they were wrong.
As long as some people perceive
that dishonest, unethical (or indeed criminal) behaviour will go undiscovered
and will result in rewards, they will continue to manipulate and distort
results. Shareholders (among others)
have now started “wising up” to this and demanding measures such as the ability
to “claw back” bonuses if it is subsequently discovered that certain behaviours
or actions actually disadvantaged stakeholders, employees or customers.
So what’s the answer? You want to reward those who truly contribute
to growth (or risk losing them), but how do you ensure that those results are
truly to the benefit of everyone? This
will vary from organisation to organisation.
One thing that has to change
is being able to ensure that those caught abusing the system are punished.
I have spent more than half my life working in different world markets from the most developed to “emerging” economies. With more than 20 years in the world financial services industry running different service, operations and lending businesses, I started my own Performance Management Consultancy and work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of services.
Labels: Career, Financial, Productivity, Risk, Social, Strategy
posted by William Martin @ 16:26
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