Welcome to the 21st Century: Why Performance-Based Compensation Doesn’t Work Today

The science is crystal clear: performance-based compensation hasn’t worked for decades. So why is business still addicted to it?

This is the second article in a 3-part series:
1. Is Your Company Operating from an Industrial-Era Playbook?
2. Why Performance-Based Compensation Doesn't Work (This article)
3. Traditional Project Management Needs and Upgrade

Almost all companies today have a compensation program for at least some employees based on performance. From CEOs who are awarded bonuses for hitting a target share price to bike messengers who are paid by the delivery, performance-based compensation is widespread today.

Clearly, given the ubiquity of performance-based compensation, one would assume that a great of deal of research has been conducted to assess the efficacy of this model. Why would all of these smart business leaders follow practices that don’t work? That would be crazy. And if you made that assumption you would at least be partially correct: decades of research have been conducted to determine if performance-based compensation works. The problem is that, according to author Alfie Kohn writing for the Harvard Business Review, the research all confirms the opposite conclusion:

As for productivity, at least two dozen studies over the last three decades have conclusively shown that people who expect to receive a reward for completing a task or for doing that task successfully simply do not perform as well as those who expect no reward at all.

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Is Your Company Unwittingly Operating from an Industrial-Era Playbook?

Many core business practices commonplace today are rooted in techniques developed during the turn of the twentieth century and are hindering companies from staying competitive in a business environment characterized by extreme uncertainty.

This is the first article in a 3-part series:
1. Is Your Company Operating from an Industrial-Era Playbook? (This article)
2. Why Performance-Based Compensation Doesn't Work
3. Traditional Project Management Needs and Upgrade

A natural result of human evolution is the desire for man to establish control over the world around him. Ever since the earliest days of civilization, long before science, man conducted rituals to foretell the future and performed ceremonies to control the environment. Fortunately for us, we learned a thing or two along the way, developed science, and switched from rain dances to irrigation systems.

In fact, we were so successful using science to control our world, it was only a matter of time before we applied scientific principles to business. In the early 1900s, management pioneers like Fredrick Taylor, Henri Fayol and Henry Gantt led the charge. Taylor, acknowledged as the father of scientific management, realized that factory workers became more productive when their compensation was tied to their output, and thus developed the concept of piece rates. Fayol, considered the father of modern business administration and project management, defined the five essential functions of project management:

  1. To forecast and plan
  2. To organize
  3. To command or direct
  4. To coordinate

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Never Ending Digital Disruption is the New Normal

Technological change is increasing at a such crazy pace, the disrupters themselves are facing existential threats from new upstarts. How can established companies hope to compete in this new world of constant change?

The rate at which technology is advancing is increasing at an exponential rate. At first glance, this is not new news. We all know that technology is changing quickly. The Internet came along and transformed the business landscape. Old guard companies like Blockbuster (est. 1985), Tower Records (est. 1960), Newsweek (est. 1933), Barnes & Noble (est. 1873) and Best Buy (est. 1966) got hammered. Then came the iPhone. The era of the smart phone began.

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