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