euro, economy

Performance rewards need revision.

It seems so obvious. If someone performs better, is more productive, more focused, then praise and reward that person. By the direct linkage between desired performance and reward, a drive is generated to continue high performance. However, there have been several studies done which prove that this is a false assumption. Recently, a new study on this issue also shows that performance pay does not work at all.

London School of Economics

The London School of Economics has a different set of conclusions. “Our findings show that the financial perks reduce intrinsic motivation and that it may lead to unethical and dishonest behavior,” says Dr. Bernd Irlenbusch of the LSE.

This finding is interesting. Performance pay leads to undesirable behavior. What we saw with several top executives during the last years. Public and / or organizational interest are put on second place. Because their pay is tied to the performance of the company, they will make every effort to secure their compensation, whatever the consequences. It leads to short-term thinking and artificial enhancement of Profit & Loss sheets. In addition, the long-term consequences [continuity and stability of the organization] is lost sight of.

It is further clear that talented people, will look for the same level of people because they expect those people to realize a better performance. However, a team works only really well when there is sufficient diversity. Diversity in the form of knowledge, experience, character and skill. In the absence of diversity, deadlocks will arise due to envy and distrust.

New or old CEO

The Harvard Business School questioned performance rewards for some time. V. G. Narayanan, professor of business administration at Harvard Business School, argues strongly that the reward policy should be completely revised. He argues that the public and politicians do not need to ask how much CEOs should earn, but how their pay is to be composed and who determines that.

The reward must be so constructed that it attracts the right manager and that person is encouraged to lead the company to great achievements. Effective reward systems should instead focus on learning and growth, process improvements and customer satisfaction.”

Organizations should be aware that high financial demands of Top Ceo’s are merely based on past successes. There is no guarantee that your organization will actually benefit. As any person that has a long time experience in it’s field of expertise, one tends to repeat themselves. We perform the same old trick over and over again. It worked before, didn’t it?

Indeed. A repeated trick, is not necessarily what your organization needs. The most innovating companies are not the old major companies. Real innovations are not thought off in board rooms, but most of the time on obscure attics.
So question yourselves what you company really needs. Old proven track records or new innovative visions that will let your organization distinct from the great grey pool. New CEO can bring around that kind of vision, without having excessive financial demands. They are still eager to prove themselves by finding new roads. There motivation is intrinsic not financial.

Full revision

Also managers within companies must be evaluated more on the long term goals of the organization. A manager who is evaluated strongly on the short term results, will only put his mind on those short term goals. Often, this leads to overrun of the organization. This puts the organization in a negative trend of constant restructuring.

Companies also need to become more engaged with issues of CEO succession ‘s. It should not look for the “super CEO”, but the CEO that best fits the organization and prepare the organization’s long-term result and who is prepared to accept the related reward. The absence of a succession policy leads to excessive demands remuneration of CEOs. Looking for the top CEO leaves the organization without bargaining opportunities and has at such moments no other alternative then to accept the sometimes excessive financial demands.

This change in the reward system should be viewed by the company in order to ensure a balance within the organization and should not be imposed by the Government. From the organization it can be determined what best suits the strategy of the organization. A remuneration ceiling for one organization will work fine while with other it will fall short.  The fact that a nationally operating organization is not comparable to global players, also has it’s impact on the financial rewarding system.