There is a thought-provoking question raised by a pair of recent articles in the Harvard Business Review: is executive compensation most effective as a fixed or a variable scheme? With apparent support for either option, there remains another possibility that may help contribute to executive performance, providing specific insight into executive behavior: recognition.
To understand why, it is helpful to first examine the dueling arguments on executive pay. The authors of these articles take very different philosophical stances, but both ultimately attempt to address the motivational signals sent to the executive and what behaviors are expected as a result.
Fixed or Variable Pay?
In the first article, Dan Cable and Freek Vermeulen argue that executives should be paid a fixed salary. In their proposal, they synthesize a body of psychological research that suggests variable pay is not conducive to creative and non-routine work, skews focus and behavior towards narrow definitions of performance, increases the likelihood of short-term cheating, and crowds out intrinsic motivation. Contingent pay may get executives behaving differently, but perhaps not in the ways that are desired. They argue that executives are already mostly intrinsically motivated, so that fixed pay simply makes more sense.
The second article by Alex Edmans provides a counter-argument, advocating for variable performance-based pay. Taking a financial approach, he argues that executive decisions will all (eventually) be captured in the long-run stock price, which serves as a comprehensive measure of performance against which contingent pay schemes may be reliably based. Fixed pay, on the other hand, allows executives to “coast” without the clear alignment between incentives and productivity. Contingent pay is required to incentivize executives to make the hard decisions that come with the role.
Which proposal (and in what ratio) is more likely to be the correct one? Does an executive require at-risk incentives in order to perform at the level required, or is intrinsic motivation (and a salary guarantee) sufficient to get optimal performance? More importantly, how can we better encourage the desired behaviors from executives?
Beyond Pay and Toward Recognition
It probably depends. But perhaps the specifics of the pay scheme matter less than we think they might, which seem to be rather coarse instruments in the scope of specific behavior or decisions even at the executive level. For example, pay either will remain fixed regardless of which behaviors are performed or be quite distant from those behaviors if we rely on the recommended “long run” criteria.
Recognition, on the other hand, may be a valuable alternative that addresses arguments made in both articles. To start, it is tied to specific behaviors and actions the executive takes, and can be frequently provided by any member of the executive’s top leadership team or other individuals with clear insight into particular issues facing the organization.
Recognition also works to improve the intrinsic motivation of behavior because it communicates meaning, value, and contribution- and because it is unexpected, avoids the “crowding out” phenomenon. Executives can be recognized for their creativity in challenging situations, ethical choices in response to crisis, as well as other behaviors that represent the full continuum of what makes an executive successful within a specific organizational culture and/or industry. The frequency and specificity of recognition also encourages positive cycles of performance, avoiding the potential pitfall of “coasting” and inaction.
I have no doubt that this proposal may sound odd to those in the compensation industry, where recognition is usually reserved for lower levels of the organization, but there is strategic value to recognizing executives if we can get used to the idea and have the courage to do so.
What is your perspective on the role of recognition in the executive space?
As Globoforce’s Vice President of Client Strategy and Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. He is the co-author of "The Power of Thanks" and his articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.
Comments