Knowing and Making

Tom Powdrill has a question : why do companies think that higher pay leads to better performance? He's right to point out that there are lots of studies now showing the opposite: higher pay can lead to worse performance. But these are mostly lab studies which don't replicate all the conditions of real life. To explain why companies might think this, notice that the implicit basis of pay-for-performance is that there is a cost to the worker of doing good work. Otherwise, why would we need to pay them more to do it? So, is it true that workers bear a cost if they do well? In traditional work, where the quantity of labour largely controls the value of the output, this is certainly true. Digging more coal takes effort and time, hence we might want to compensate the worker for doing so. One can make a similar argument for writing more lines of Java code, though that's more controversial - mainly because more is not necessarily better. But Tom is talking about management...

The motivation principle : People act in their best interest, in the light of the information available to them, over a time period that they can accurately foresee. The first two of these statements seem relatively obvious but perhaps the third is not so clear. It means that people will not take an action today, for some nebulous potential benefit one day in the future. They must gain something in return for the action either immediately, or within a time horizon that they can clearly grasp. How long is that? If I make a calm and considered decision, the time horizon may be as much as a few hours; while in the heat of the moment it may only be a few seconds. Either way, in order to act in my longer-term interest, I must get some kind of short-term payoff or else it's too easy to sell out on my decision. For example, if I want to lose ten pounds and be able to run a marathon in six months, I won't succeed unless I give myself incentives that keep paying off for all those early ...