Since the global financial meltdown, there has been great controversy over the large salaries and bonuses that many executives continue to receive. Companies claim that these salaries and bonuses are essential to attracting and retaining talent. Companies, like AIG and Fannie Mae, even go so far as to state that they need to pay retention bonuses to keep employees who created the current financial mess because only the have the expertise to disentangle it.
At the core of these claims is the assumption that people are driven primarily by money, but is this true? The evidence suggests otherwise. Surveys asking people what drives them find that people rank appreciation and interesting meaningful work higher than money.
Money is obviously a primary motivator when people lack basic necessities for survival but it hardly applies to people in rich countries who often have more than enough money to fulfill their basic needs for food and shelter. This is particularly true of CEO's and high-level executives who in many cases have, not only one home, but two or three homes in choice locations around the world.
There are a number of reasons why money fails as a motivator. First, it's lure is short-term. Bonuses and salary increases may initially raise performance, but their power quickly fades. The psychological phenomena called habituation takes place. People begin to take a salary level or bonus for granted. Thus for money to be an effective motivator, the amount must continually be increased, creating a cycle whereby larger and larger amounts are needed to have the same effect.
Second, there are dangers associated with using money as a primary motivator. People who are driven by money are likely to put their own self-interest before the long-term interests of the company. Enron's downfall can, in part, be traced to Andrew Fastow co-opting organizational processes to serve his own self-interest.
Third, there is no reason to presume that bonuses will attract talent and increase retention. There is always someone who is willing to wave more money under someone's nose. Hiring bonuses also encourage people to sign on and stay just long enough to collect their bonuses - a strategy employed by recent college graduates in the US who need to pay off their student loans. Furthermore, companies need to reexamine the assumption that they are still locked in a battle for talent with other companies and need to pay signing and retention bonuses in the current economic environment.
Fourth, using money to lure talent from other companies often backfires. People become company superstars, in part, because they have built a network of relationships throughout the company and know how to get things done in that company.
But this organizational knowledge doesn't transfer to other companies. When stars move to a new organization, they often perform poorly because they must rebuild the organizational knowledge and social capital that fueled their success in their previous company.
Fifth, just like a top sports team, companies succeed by people working together. Singling people out for bonuses based on performance destroys team work and cooperation. It also creates resentment because everyone believes that they are worthy of a large bonus.
Sixth, aligning monetary incentives with performance is difficult to do for higher-level positions in which most people are so far removed from the production process that it impossible to measure their individual contribution to successful outcomes.
For example, the practice of linking CEO pay to company stock prices presumes a direct measurable relationship between a CEO's actions and a company's profitability and stock prices. This is far too simplistic and doesn't take into account the lag factor in this relationship.
As Paul Krugman noted in his April 10, 2009 New York Time's column, Stanford Weill's claim that he deserved the millions he made as Chair of Citigroup is now questionable given that Citigroup has lost 90% of its value since Weill made this statement. Add to this the fact that stock market prices can be influenced by other factors, such as the psychological state of mind of investors, over which CEO's have little control.
Finally, the belief that you can only get a top CEO by providing a large pay package ignores man's competitive nature. Would an executive who has fiercely competed for many years with his or her peers to become CEO of his or her company turn around and refuse the job based on the pay package?
Given the fact money is a poor way to drive performance, why does the myth continue to exist? It may, in part, be due to our clinging to historical views of work which portray it as odious back-breaking life-draining labor that no one would do if they had another choice.
Companies need to reevaluate their belief in the power of money. If they do choose to use money as a primary motivator, this decision should be based on solid data showing a strong relationship between monetary incentives and job performance.