Pay-for-performance (PFP) compensation systems were invented in the industrial age to drive individual performance — and despite research showing that this ap-proach is ill-suited to much of the knowledge work performed in organizations today, the practice persists as the norm.1Compensation systems remain stuck in the past for several reasons. The first is, essentially, inertia: Companies have been using PFP for decades, and the best practices disseminated by compensation consultants usually derive from it. Additionally, most leaders are either not aware of the research on PFP or dismiss it as unreliable. Finally, leaving PFP behind and taking the leap required to design and implement a new compensation system can be a fearful prospect, given the potential impact on performance and results as a consequence of getting it wrong.
However, organizations may have more to lose by failing to move beyond PFP. We conducted a large-scale experiment with a target-independent compensation system. The results point to a strong business case for leaving PFP behind.
THE RESEARCH
The authors reviewed the literature of pay-for-performance (PFP) compensation systems over the past 50 years to understand their dysfunctional elements.
They ran an experiment in which they replaced a PFP compensation system with a target-independent system in the direct sales force of a country organization of Hilti Group.
The authors analyzed the results of the new system using performance data, surveys, and qualitative interviews with salespeople and the management team.
The Dysfunctional Elements of PFP
Bu hikaye MIT Sloan Management Review dergisinin Summer 2022 sayısından alınmıştır.
Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 9,000+ magazines and newspapers.
Already a subscriber ? Giriş Yap
Bu hikaye MIT Sloan Management Review dergisinin Summer 2022 sayısından alınmıştır.
Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 9,000+ magazines and newspapers.
Already a subscriber? Giriş Yap
Avoiding Harm in Technology Innovation
To capitalize on emerging technologies while mitigating unanticipated consequences, innovation managers need to establish a systematic review process.
Make a Stronger Business Case for Sustainability
When greener products and processes add costs, managers can shift other levers to maintain profitability.
How to Turn Professional Services Into Products
Product-based business models can help services firms achieve greater scale and profitability. But the transformation can be challenging.
Do You Really Need a Chief AI Officer?
The right answer depends on the strategic importance and maturity of AI in your company.
Where To Next? Opportunity on the Edge
Doing business in regions considered less stable or developed can pay off for companies. But they must invest in working with local communities.
Make Smarter Investments in Resilient Supply Chains
Many companies invest in resilience only after a disruption. Applying the concept of real options can help decision makers fortify supply chain capabilities no matter the crisis.
The Three Traps That Stymie Reinvention
Organizational identity, architecture, and collaboration can be either assets or liabilities to pursuing growth in new sectors.
What Makes Companies Do the Right Thing?
Vaccine makers varied widely in their engagement with global public health efforts to broaden access to COVID-19 immunizations. Ethically motivated leadership was a dominant factor.
Build the Right C-Suite Team for Your Strategy
CEOs can foster a more effective leadership team by understanding when to tap senior executives' competitive instincts and when to encourage collaboration.
A Better Way to Unlock Innovation and Drive Change
A strengths-based approach to building teams can win employee commitment to change and foster an inclusive, agile culture.
