The incentive effect of pay for performance is not positive

„A considerable number of empirical research papers show that there is actually no relation between the performance-related salary of a CEO, and the performance of an enterprise. The incentive effect of pay for performance is not positive: It worsens the conflicts between shareholders, staff and management. 

Numerous experiments, field studies and meta-analyses show that external incentives, particularly money, under certain circumstances have a negative effect on the performance. The crowding out effect is empirically well documented. Metaanalyses indicate that intrinsic motivation is eliminated by external incentives displaying a controlling character,“ Katja Rost and Margit Osterloh emphasize.

„If intrinsically motivated persons are caused to act according to external control their intrinsic motivation is reduced. They tend to enjoy their work less because their autonomy is reduced. Studies show that tangible rewards only have a positive net effect when the original intrinsic net effect is low.

Pay for performance promotes strategic behavior of people; they only concentrate on tasks with monetary rewards and neglect anything else. In the case of CEOs there exists a huge amount of empirical evidence which confirms that pay for performance, especially stock options and bonus payments, promote manipulation or even fraud. The multi-tasking effect has caused stock options to become more and more ´heroin for managers´´.

„Pay for performance is even to be introduced for researchers at universities, e.g., by means of periodical evaluations, in which publications and citations are counted. The effects are just as counterproductive as with CEOs: They increase the number of their publications at the cost of the quality of their research.“

Katja Rost, Margit Osterloh
Management Fashion Pay-for-Performance for CEOs.
in: Matti Vartiainen, Conny Antoni et al. (Eds.)
Reward Management – Faccts and Trends in Europe
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