The dangers of performance based pay include the absence of great performance in the future.

Dangers of Performance-based Pay

on April 6 | in Ethical for Executives, Featured | by | with No Comments

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Many businesses today use what we call performance-based pay. Unlike performance-based promotions, this pay is based in a given time frame. For an employee, a percentage of their compensation comes from their performance in their current position at the business. However, there are many people who can see the dangers of performance-based pay.

For chief executives and other senior leaders, it is not unusual for 60 to 80% of their pay to come from performance. In interviews I have watched, it is interesting to see how the CEO’s react to bonuses. They usually are surprised to receive them, however, they have no intention of working any harder or any less in a year. Now we are going to uncover the truth and the real dangers of performance-based pay.

3 Uncovered Dangers in the System

1. Fixating on Performance Can Weaken It

The goal of most incentive programs is to motivate employees to reach hard goals and achieve outcomes for the company. The want to learn has proven more effective than the want to outperform. Dan Cable states that, “For example, in a study of salespeople conducted during a product promotion, researchers found that salespeople with a learning mindset significantly outperformed salespeople with a performance-oriented mindset.”

2. Internal Motivation Trumps External Motivation

When people are motivated by their own goals and want success, they have a sense of achievement. They do things because they want to do them. This is not the case for external motivation through the company or supervisors. In my own experience, I would like to compare this with school reading. As a student, when I am told to read a novel for class, I am not excited to do so. However, when I am home and find a book that fascinates me or that I want to learn something from, I am more likely to read it faster and enjoy it more. This goes hand in hand with the company work as an employee.

3. The Endless Competition for Talent

As a business, you want the highest talent of work in your company or firm. When seeking out these employees, you advertise incentives and financial awards. The downside is that you will attract people who are not financially well off and are just working for the money, instead of the passion or drive they have. This may lead to people who will not perform as great as you would hope. As Theresa Amabile has noted, “There is abundant evidence that people will be most creative when they are primarily intrinsically motivated, rather than extrinsically motivated by expected evaluation, surveillance, competition with peers, dictates from superiors, or the promise of rewards.”

As we can see there are in fact dangers of performance-based pay, and it may be less ethical than we first thought. This article provides us with why we should look to other alternatives and why intrinsically motivated employees are the most efficient and successful.

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