The whole issueof Executive compensation is coming under increasing scrutiny by just about everyone these days and rightfully so.  Here is an interesting question – Do Bonuses actually incent behavior to perform better?

This is a foundational question as much of the compensation plans are based on the strongly held belief by most people that money incentivizes performance.  It has been my experience throughout my management career that money was never a great motivator.  My experience has followed Herzberg’s principal that money is a hygiene factor – it can de-motivate but not motivate.

So what say the experts?  In a recent study conducted by Dan Ariely, a professor of behavioral economics at Duke and author of “Predictably Irrational: The Hidden Forces That Shape Our Decisions”. He and three colleagues conducted experiments to look at money as a motivating factor, and concluded that “people offered medium bonuses performed no better, or worse, than those offered low bonuses.” Meanwhile, individuals “offered the biggest bonus did worse than the other two groups across all the tasks.” He and his colleagues found that bonuses do not motivate as we might think they do.

Wow, what will this do to righting the ship when it comes to CEO comp plans I wonder.  Perhaps it will help us get back to a more appropriate approach to compensation.  One that rewards performance not incentivizes behavior.  (Not sure what the difference is, come back to the blog for my thoughts on that topic).