The Dangerous Power of Pay

One aspect of compensation that has always fascinated me is the psychology of motivating people to do what you want. People are motivated by a lot of different things and there’s a lot of literature around that. However, the common belief is that money is number one and always will be, especially amongst sales people. I’ve always bought into that. I’ve advised clients to simplify compensation plans down to where they know what to sell, how much to sell, and how much money they’ll make when they achieve their goals.

If you want something sold, put a quota on it.
I always say…

When you set a goal for someone and measure it, it is very powerful motivation. When you attach large sums of money to it, it becomes insanely powerful. This power can be dangerous and we’ve all seen it. Individuals with variable compensation plans can become obsessed with satisfying the plan, sometimes with little regard for the overriding spirit of their responsibilities.

This column, “The Dark Side of Incentives” by Barry Swartz in Business Week has several such examples of how incentives can change behavior in unintended ways.

Here’s a snippet:

The inescapable flaw in incentives, as 35 years of research shows, is that they get you exactly what you pay for, but it never turns out to be what you want.The mechanics of why this happens are pretty simple: Out of necessity, incentives are often based on an index of the thing you care about—like sound corporate leadership—that is easily measured. Share price is such an index of performance. Before long, however, people whose livelihoods are based on an index will figure out how to manipulate it—which soon makes the index a much less reliable barometer. Once share price determines the pay of smart people, they’ll find a way to move it up without improving—and in some cases by jeopardizing—their company.