So I was quoted in Human Resource Executive Online:
Jodi Beggs, a researcher in the field of behavioral economics and incentives who focuses specifically on when, if and how incentive schemes work, says the jury is still out on whether pay-for-performance compensation plans will someday be the norm.
“The high-level summary of academic findings is that pay-for-performance can work in some contexts and with certain types of work, but can have unintended consequences and even lead to lower performance in others,” says Beggs, who is based in the Boston area.
To wit, the Kelly’s research notes that pay-for-performance plans are more prevalent in financial services, travel and leisure, retail and business services as opposed to other industries.
“I don’t necessarily disagree with the survey finding that some employees would be in favor of pay-for-performance systems in their workplaces,” she says, “but they certainly aren’t the silver bullets that they are sometimes made out to be.”
It’s true- I *am* based in the Boston area:
(My office is in the building with the clock above the door.) I found this article to be interesting because of the survey data that shows that people want pay-for-performance systems to be implemented in their companies. This is perplexing to me on a couple of levels:
- For the last few years, I have been reading about teachers’ unions who have been fighting tooth and nail to prevent pay-for-performance plans from being implemented in their districts. Now, I do understand that part of this pushback has to do with the fact that there’s not really a good way to measure teacher output (think for a second about the myriad problems inherent in paying teachers based on students’ test scores, for example), but isn’t that true of a lot of jobs? I suppose technically the article reports the attitude towards more of a profit-sharing setup then specific incentives for individual performance, so this could partly explain the difference. But it also brings me to my second point…
- Realistically speaking, how much control over company profitability does a single employee actually have? My company is, well, me (and sometimes an intern or research assistant), so I suppose I have a lot of control over the profitability of my company. If I were a CEO of a larger company, the same may be true, but these examples are the exception rather than the rule. If an employee doesn’t have a lot of direct control over company profitability, asking for compensation in the form of stock, stock options, profit-sharing bonuses, etc., is a bit like buying a lottery ticket. Employees are likely susceptible to the illusion of control in this way. It could also be the case that employees don’t see the tradeoff between performance-based and guaranteed compensation and think that the latter would be granted without them having to give up any of the basic salary in order to make this happen.
The illusion of control is a funny thing…literally:
It’s important to realize what events we do and don’t have control over, since it’s easy to slip into bad choices otherwise. For example, I’m sure that all of you have been told at some point that diversification is important in an investment strategy, and yet the very same people who diligently heed this advice go and purchase or hold stock in the company that employs them. Think about it- if something goes down with the company, not only are you out of a job, but your savings is also pretty worthless. I’m sure the former employees of Enron would be more than happy to tell you why this not the safest plan. As an economist, I can’t help but think that I would want to take a hedging approach and buy stock in the competitors to my employer, but I’m guessing that would be frowned upon to some degree.
(UPDATE: You can find a version of this article over at the Huffington Post here.)