UAE Short-Term Incentives (STI)

UAE Short-Term Incentives

Psychologists Argument

Alfie Kohn in his seminal article in the Harvard Business Review entitled “Why Incentive Plans Cannot Work” stated:

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It has been “shown over and over again [that] the more you reward people for doing something, the more they tend to lose interest in whatever they had to do to get the reward”.

“Incentives…do not create an enduring commitment to any value or action. Rather, incentives merely – and temporarily – change what we do”.

“As for productivity, at least two dozen studies over the last three decades have conclusively shown that people who expect to receive a reward for completing a task or for not doing that task successfully, simply do not perform as well as those who expect no reward at all”.

Frederick Hertzberg famously stated that just because too little money can irritate and demotivate, it does not mean that much more money will result in satisfaction and increased motivation.

Economists Argument

Economists however disagree and postulate that the salient function of incentives should be to increase the productivity of the activity.

Jenkins when formulating his article “Financial Analysis” studied 28 previously published studies and found that 57% had in fact had a positive effect on performance but only when the performance measures were quantitative in nature, such as producing more of something and/or faster. The take-away from this is that STI performance targets must be quantitative – achieve an EBITDA of X or revenue of Y.

We have been saying this for years – any goal, objective or performance condition should have a calculable return on investment (“ROI”) and be “self-liquidating”; where the cost of the incentive represents a percentage of value added for the company.

Prendergast in an article entitled “The Provision of Incentives in Firms” found that there was empirical evidence that the use of incentives improves performance.

Edward Lazear in his article “Performance Pay and Productivity” examined the impact of a change from fixed salaries to piece-rate compensation in an auto-glass factory. Productivity soared and output per worker was increased by 44%.

Axiomatic’s View

Considering the conflicting opinions elucidated above, we feel that we need to declare our position.

An appropriately designed STI scheme will support and reinforce a high-performance culture and encourage ethical behavior consistent with the company’s values. However, the risk-reward must be balanced where the scheme is structured in such a manner that it incentivises the employee to promote sustainable long-term growth, without encouraging excessive risk taking or a short-term parochial focus.
The scheme should be designed with a view of encouraging recognition and strengthening the psychological engagement with employees, while at the same time, providing top talent with an extrinsic monetary reward for their hard work and dedication.

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