Posted by: A.R. Cherian | October 15, 2009

The sins of commission

I just read a chapter called “Sins of Commission: Be careful for what you pay for, you may get it” from the book What Were They Thinking? Unconventional Wisdom about Management by Jeffrey Pfeffer.

The author attacks the premise that pay incentives (commissions) are seen as the solution to a lot problems in management and organizational performance. He states the fact that financial incentives often have undesired and unanticipated consequences. They can often drive bad behaviors.

He lists several cases where offering pay incentives for employees to perform better actually ended up companies costing more money and led to cases of bad behavior and abuses of the incentive system. One example was pay incentives for teachers tied to improved test scores actually led to cases where teachers gave comprehensive test reviews with exact questions and sometimes even the answers!

Pfeffer believes the problem with most of these systems is that employees have to figure out which behavior the company values by “following the money” – what earns them the most money.

It is also argued that fixing financial incentives to drive performance is seen as an apparent “quick fix” by many managers. It is easier than tinkering with other factors of individual and organizational performance.

His solution is that incentives shouldn’t be used to drive behavior, but instead to provide recognition and a chance to share the company’s success with its employees. If you have to institute financial incentives for performance, then do so with caution and consider how an extreme bad behavior can result from the system. Lastly, he states that “companies that succeed in building high-performing cultures communicate relentlessly about what really matters and why.”

Pay incentives for performance: proceed with caution.

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