pay for performance

The idea of payment for performance seems logically overwhelming. Pay people more for delivering more, and that's what companies obviously get - more productivity, more profits and, above all, more sales.

Even in businesses where nobody else enjoys individual incentives, the sales force almost certainly earns substantial commissions, sometimes huge. One sales force, for example, has 600 reps averaging £150,000 in annual pay, two-thirds of which is commission.

That's an American example, EMC Corp., and an extreme one. There's no lid on commissions, and the 65% compares to some 25% at IBM, a rival in disc storage. But both companies enshrine the ardent US belief that salespeople will cease to sell unless the commission carrot is dangled before them.

It's often backed by a heavy stick. At EMC, miss targets for two quarters, and you're out. But is that really 'the most effective way to motivate people to work productively'? Not according to Professor Jeffrey Pfeffer, writing in the Harvard Business Review. He cites two unincentivised big winners (an airline and a software giant) to back his case.

He could have added IBM. The commission system impelled its sales force to concentrate disastrously on large, expensive computers when the market was moving irresistibly to small, cheap ones. Every manager knows the similar trap in all industries: reward salespeople for sales alone, and they may flood their books with business that's unprofitable - for you, but not for them.

British insurers now licking their monetary wounds over pension misselling fell into a still deeper hole. The emphasis on commissions (sometimes the sole reward) created a pervasive culture of greed that ran rampant. Culture is the key to Pfeffer's argument. As he says, 'it's simpler to tinker with the compensation system than to change an organisation's culture'.

Pay for performance, though, is no substitute for management. A wise manager once observed that it takes excellent management to make incentive pay work: if you have excellent management, though, you don't need incentives. Build a company for which people love to work, which develops and uses their talents, and ties their highly satisfactory rewards to group performance, and everybody will respond - even the sales force.