A few weeks ago the Harvard Business Review published an article with the provocative title, Stop Paying Executives for Performance. The main thesis was, as you might expect, that companies should stop paying executives for performance. The authors give a number of reasons:
- Performance-based pay only really improves performance for routine tasks, not activities which require creativity and out-of-the-box thinking.
- The best performance tends to come when creative professionals focus on improving their skills rather than focusing on outcomes.
- Intrinsic motivation is more powerful than extrinsic motivation, and performance-based pay tends to only drive extrinsic motivation.
- Performance-based pay encourages people to cheat to hit bonus thresholds.
- No performance measurement is perfect.
You can argue about whether the authors' conclusion is right (and in the comment section of the article several people argue that they are wrong), but there's no question they make a strong case for an interesting and counterintuitive idea.
To me as a Customer Experience professional, what's most interesting about this is that the same arguments can be made about performance-based pay for many customer-facing employees, since delivering a great customer experience often requires employees to go beyond the rote skills and find creative solutions to the customers' problems.
A great example of this is the declining use of Average Handle Time (AHT) in many call centers. Over the past ten years I've spoken with a lot of call center managers who have stopped evaluating (and compensating) their customer service reps based on how long they spend on the average call. Every single one has described significant improvements in the customer experience. Several also said that their AHT didn't even go up as a result.
Removing AHT from the employee's compensation meant that reps were freed from having to worry about the mechanical part of their job--how quickly they could get someone off the phone--and instead think about the best ways to solve the customer's problem. The other problems with performance-based pay also show up in customer service, since focusing on AHT can lead employees to cheat (for example, by occasionally "accidentally" hanging up on a customer at the beginning of a call). AHT turns out to not be as tightly tied to operational cost as most managers expect, because customers will often call multiple times if they don't get the service they need the first time.
Moving away from performance-based pay would be an enormous cultural change in today's business environment where the implicit assumption is that money is the best, or even only, way to motivate employees. But there's decades of research in behavioral economics showing that money is only a mediocre way to drive performance in many circumstances.
If you're using performance-based pay to try to improve your customer experience, it's worth thinking about whether you're really driving the behavior you want.