Employee Compensation Plans – Are Sticks and Carrots More Effective than Intrinsic Motivations Properly Aligned?
Daniel Pink advocates in his book "Drive" that compensation plans based on extrinsic rewards can have the opposite of the intended effect. In fact, he believes that these external rewards, wrongly structured, can hamper performance. Instead, he suggests focusing on paying enough to take money off the table and empower employees through mastery, autonomy, and purpose. Others advocate variable compensation plans based on objective metrics aimed at promoting and rewarding performance. So who’s right? Are sticks and carrots more effective than aligning an employee’s intrinsic traits with a role? Do intrinsically wired employees need sticks and carrots to perform well? What type of incentives affects the intrinsically wired employee?
On one extreme, a company can compensate employees based entirely on performance measures and use bonuses and commissions as carrots to get better performance or threat of termination or pay reductions as sticks to keep employees from falling below performance standards. Generally and with some notable exceptions, the more an employee is misaligned with his/her role, the more the company needs to employ extrinsic measures (carrots or sticks) to get the desired performance. For these plans, employees typically get a base salary with significant upside based on some metrics. Or, they may be straight commission.
On the opposite extreme, a company finds the employee that for whatever reason is wired to do a particular role. They possess the required skills and are passionate about the type of work they perform. They require little external motivators since they love their job and are completely aligned with it. For these employees, a compensation plan based on a high salary with little or no bonus opportunities may be the best solution. In other words, the company puts all the money in salary and holds nothing back based on performance.
For high salary plans, it really comes down to effective management. The company takes the risk of paying a higher salary in return for an agreement of expected (and hopefully) high performance. Managers fear they won’t get the high performance despite paying the higher salaries. While easier to administrate, these plans also require a frank discussion about what an employee’s contributions are worth. Some law firms and companies may want to avoid those discussions in the beginning of the year.
Resolving this conflict comes down in part to a company’s particular philosophy about compensation, which in turn greatly affects culture. Over the years, I have found that the more a compensation plan is driven by extrinsics the more some employees will focus on the metrics as opposed to the bigger picture. We are all familiar with employees scrambling at year end to make those last minutes sales or bill or “find” those last few hours to skate by a threshold. Intrinsically wired employees are typically more steady-state performers that are less affected by metric-based bonus plans or threshold plans.
If a company is willing to tolerate lower performance or unwilling to take remedial action in the face of lower performance, then variable compensation plans may be the best option. They tend to self regulate, despite occasional gamesmanship. It takes faith, courage, and some risk acceptance to go the higher salary route. But administration is much simpler.
In my next post, I will analyze the merits of set bonus plans versus unexpected employee recognition and why law firms and other companies may want to consider investing more in flexible employee recognition plans.
For more information on law firm employee compensation plans or to get a presentation on this topic, please contact Darin M. Klemchuk.
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