”For Harvard Business Review to advise companies to stop paying executives based on performance is like your local church telling parishioners to stop dropping money in the collection basket. Yet there it is, in an article published on the magazine’s website Feb. 23: “Performance-based pay can actually have dangerous outcomes for companies that implement it.”
Lest there be any mistake, the article goes on to say, “We argue in favor of abolishing pay-for-performance for top managers altogether. We propose that, instead, most firms should pay their top executives a fixed salary.”
I spoke on Feb. 25 with Freek Vermeulen, who co-wrote the article with Dan Cable. Both are professors at London Business School. The argument has “hit some sort of a nerve,” he said. Many other authors have recommended changes in performance-based pay, such as making more of it contingent on a company’s long-term performance. But by rejecting the whole idea of performance-based pay, “some say that we’re throwing out the baby with the bathwater,” Vermeulen said. He remains unmoved, he said: “I haven’t been convinced by any arguments we’ve heard.”
The theory of performance-based pay goes back to a landmark 1976 paper in the Journal of Financial Economics by Michael Jensen and William Meckling called “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” It’s based on an idea that seems so obvious to economists that it couldn’t possibly be wrong: People respond to financial incentives, so if you give them more money when they do the right things for their companies, better results will follow.
But does the real world work that way? John Cryan, the new, British-born co-chief executive of Deutsche Bank AG, has his doubts. Last November in a speech at an industry conference, Cryan said he’s skeptical that paying more necessarily motivates his employees:
“I sit on trading floors and wonder what drives people,” he said. “I don’t fully empathize with anyone who says they turn up to work and work harder because they can be paid a little bit more, but that may be a personal view. I’ve never been able to understand the way additional excess riches drive people to behave differently.”
Of his own pay, he said: “I have no idea why I was offered a contract with a bonus in it, because I promise you I will not work any harder or any less hard in any year, in any day because someone is going to pay me more or less.”
Cable and Vermeulen cite five problems with performance-based pay:……………….”
Source: Bloomberg Business News – http://www.bloomberg.com/news/articles/2016-02-26/heresy-stop-paying-ceos-performance-bonuses-harvard-business-review-says
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