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Prof. Paula van Veen-Dirks: ‘Positive effects of performance pay are overrated’

06 June 2012

People who work harder and perform better are paid more. This seems logical and fair, but according to Paula van Veen-Dirks, professor of Management Accounting at the University of Groningen, the disadvantages of performance pay are usually greater than the advantages. ‘It may even poison organizations.’

Paula van Veen-Dirks
Paula van Veen-Dirks

‘It is of course true that people work slightly harder if they are judged on their performance,’ says Van Veen-Dirks. ‘But you must watch out for the unwanted side effects – and there are plenty of those.’ On balance, the negative effects are usually even greater than the positive aspects of a variable financial reward, according to Van Veen-Dirks.

Public indignation

Performance pay attracts attention, and not only because the business world – especially the financial sector – is known for awarding considerable bonuses to its top executives. Other businesses, too, regularly make room for performance-related pay in their collective labour agreements. Van Veen-Dirks: ‘On the one hand the public is calling for the abolition of performance-related pay, but on the other hand its popularity is on the rise in other sectors, such as education.’

However, performance-related pay is particularly a bad idea for a sector like education, according to Van Veen-Dirks. ‘In order to assess performance, you first need to lay down criteria, but it is extremely hard to measure someone’s teaching abilities. Once a standard has been established, there’s a risk that teachers will try to perform well in only that particular field – neglecting their other duties as a result.

Side effects

Performance pay therefore comes with numerous side effects, explains Van Veen-Dirks. For example, when judged on the average final test score of a class, it is in the interests of a school principal or teacher to have good students. As a consequence, weaker students may run the risk of being barred. And if clear standards are missing, who decides what high-quality teaching is – colleagues, students, pupils, parents, education managers? Van Veen-Dirks therefore welcomes state secretary Halbe Zijlstra’s decision to stop experimenting with performance-related pay for teachers and education administrators.

Motivation

A major objection to performance pay is that it comes at the expense of what is called intrinsic motivation, Van Veen-Dirks argues. This is the urge people have to do their best because they think it is important, without there having to be an external reward. ‘When people are extrinsically motivated by incentive compensation, their intrinsic motivation is supplanted: the crowding-out effect,’ Van Veen-Dirks explains. ‘This results in a decrease in overall motivation.’

Intrinsic motivation is of particular importance when dealing with complex and creative tasks. According to Van Veen-Dirks, it is precisely this complexity and need for creativity that is required in an increasing number of occupations. This has everything to do with our modern information and knowledge-oriented economy and society. ‘In addition, organizations operate in an increasingly uncertain environment. This makes it harder to define the targets and the performance of organizations as a whole. The performance of individual employees is therefore even more difficult to define, making it harder to use extrinsic rewards as a means of getting people where you want them.’ For this reason, it is much more useful to appeal to intrinsic motivation, Van Veen-Dirks continues. ‘Which is different from formulating targets, measuring results, and judging someone on the basis of their performance.’

Impoverishment

Too strong an emphasis on a performance-related pay system can ‘poison’ or at least ‘impoverish’ an organization in several ways, says Van Veen-Dirks. ‘It has everyone running after performance standards set by the top management, and the more important the standards, the more effort employees will put into trying to meet them – sometimes at any cost. And this may lead to people resorting to unpleasant actions, such as putting colleagues in a bad light, claiming results as their own, and making results seem better than they are. It will often cause fierce competition among people in any case.’

It may also affect the longer-term development of an organization: ‘When people find out that a certain trick or certain behaviour leads to higher pay, they may repeat this at the expense of creativity and innovation.’

Balance

‘I’m not saying that money can’t be a great incentive,’ says Van Veen-Dirks. ‘Neither am I trying to get across some kind of naive, soft notion that everyone within an organization should be kind to one another. However, as I often see that performance pay is not working as it should, I’m calling for a greater balance.’ Variable pay, for instance, does work for those occupations that do not depend highly on intrinsic motivation, Van Veen-Dirks emphasizes – such as routine work or chores that need to be done but that nobody really feels like doing. ‘In those situations, the prospect of a bonus may encourage people to perform well.’ Performance-related pay can also work to encourage change in people who have been doing the same work in the same way for a long time.

Curriculum Vitae

Paula van Veen-Dirks (Enschede, 1967) studied Industrial Engineering and Management at Eindhoven University of Technology. She then completed the Executive Master of Finance and Control at Maastricht University. She conducted her doctoral research at Tilburg University where she was awarded a PhD in 2002 for a thesis entitled ‘Flexibility and control: an empirical study relating production flexibility to the design of performance management systems’. In 2006 she was appointed associate professor of Accounting and Control at Radboud University Nijmegen. In June 2011, Van Veen-Dirks became a professor at the Accounting department of the Faculty of Economics and Business at the University of Groningen.

Last modified:15 September 2017 3.10 p.m.

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