L'art de (se) diriger ( le blog de Laurent Pellegrin)

According to Bruno S. Frey and Margit Osterloh, (Warwick Business School) the evidence is overwhelming : it doesn't work ! It also may induce excutives to take company-killing risks.

1. In a modern economy, where new challenges emerge constantly, it's impossible to determine the tasks that will need to be done in the future precisely enough for variable pay for performance to work well;
2. People subject to vaiable pay for performance don't passively accept the criteria. They spend a lot of time and energy trying to manipulate the criteria in their favor, helped by the fact they often know the specifics of their work better than their superiors do.
3. Variable pay for performance often leads employees to focus exclusively on ares covered by the criteria and neglect other important tasks.
4. Variable pay for performance tends to crowd out intrisic motivation and thus the joy of fulfilling work.

In brief, variable pay for performance while it may seem attractive in theory, creates more problems than it solves.

There are other ways to motivate employees that yield better results at lower cost : to select employees more carefully, to care for the well-being of other individuals, and value recognition from coworkers, to pay fixed compensations but to adjust on the basis of a comprehensive evaluation of employees' work after some time to avoid the "multiple tasking problem (3). At the end of the year to distribute part of the profits to employees according to their overall performance rather than than preset criteria.

Source : Harvard Business Review (January-February 2012).