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
This story is from the Summer 2022 edition of MIT Sloan Management Review.
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This story is from the Summer 2022 edition of MIT Sloan Management Review.
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