[A]ll variable-pay-for-performance schemes still suffer from four inescapable flaws:
1. In a modern economy, where new challenges emerge constantly, it’s impossible to determine the tasks that will need to be done in the future precisely enough for variable pay for performance to work well.
2. People subject to variable pay for performance don’t passively accept the criteria. They spend a lot of time and energy trying to manipulate the criteria in their favor, helped by the fact that they often know the specifics of their work better than their superiors do
3. Variable pay for performance often leads employees to focus exclusively on areas covered by the criteria and neglect other important tasks. This is known as the “multiple tasking” problem.
4. Variable pay for performance tends to crowd out intrinsic motivation and thus the joy of fulfilling work. Such motivation is of great importance to business, because it supports innovation and encourages beyond-the-ordinary contributions.
The idea that people work only for money has been thrown overboard by leading scholars. Research has shown that human beings are not interested solely in material gain. They care for the well-being of other individuals and value recognition from coworkers. Many employees apply themselves because they find their work challenging and worthwhile. These non-material motivations point to better ways to get results from the members of an organization.
The same idea keeps coming up; Seth Godin says [paraphrasing] "when it comes to work generated for a 21st century economy, if you are measuring it, you are doing something wrong". I add, surely there are things we should measure, things that are finite (diminishing resources, food, etc). But creative works increasingly defy any sane measurement criteria.
This also somewhat ties in with Milton Friedman's "give all citizens X amount of money, no questions asked" idea. Also, we shared an article here about funding science. We did not share it entirely, we skipped the solution, which is "to fund people rather than projects", in other words, relaxing our success criteria, giving people lots of chances to fail, and to stop micromanaging which is exactly what pay-for-performance is.
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