Performance-based pay can have dangerous outcomes for companies that implement it for chief executives and other senior leaders, according to a study by two academics at London Business School. Writing in a recent issue of Harvard Business Review, Dan Cable, who is Professor of Organizational Behavior at London Business School, and his colleague Freek Vermeulen, an Associate Professor of Strategy and Entrepreneurship, argue in favour of abolishing pay-for-performance for top managers altogether. Instead, they reckon most firms should pay their top executives a fixed salary.
Their argument is based on five ‘related, data-backed insights from research’:
1. Contingent pay only works for routine tasks.
2. Fixating on performance can weaken it.
3. Intrinsic motivation crowds out extrinsic motivation.
4. Contingent pay leads to cooking the books.
5. All measurement systems are flawed.
Cable and Vermeulen conclude:
‘For chief executives and other senior leaders, it is not unusual for 60-80% of their pay to be tied to performance – whether performance is measured by quarterly earnings, stock prices, or something else. And yet from a review of the research on incentives and motivation, it is wholly unclear why such a large proportion of these executives’ compensation packages would need to be variable.’