Pay-for-Performance does neither create nor improve performance, nor does it help you to attract or retain 'High Performers'.

We know that this statement is heresy, but there you are.

There is a suspicious lack of empirical evidence that the current obsession with establishing pay-for-performance strategies and incentive pay environments actually results in anything but a singular spike of increased output.

As for productivity, at least two dozen studies over the last three decades have conclusively shown that people who expect to receive a reward for completing a task or for doing that task successfully simply do not perform as well as those who expect no reward at all.

And the lack of positive evidence is not limited to functional levels. Consider the findings of Jude T. Rich and John A. Larson, formerly of McKinsey & Company. In 1982, using interviews and proxy statements, they examined compensation programs at 90 major U.S. companies to determine whether return to shareholders was better for corporations that had incentive plans for top executives than it was for those companies that had no such plans. They were unable to find any difference¹.

And we believe that there is a very valid reason for that. The 'Carrot and Stick' approach was designed for wild donkeys and should be limited to that species. In the 21st century the management of people really has to move away from the laboratory animal treatment phase.

The surest way to destroy cooperation and, therefore, organizational excellence, is to force people to compete for rewards or recognition or to rank them against each other. For each person who wins, there are many others who carry with them the feeling of having lost. And the more these awards are publicized through the use of memos, newsletters, and awards banquets, the more detrimental their impact can be. Furthermore, when employees compete for a limited number of incentives, they will most likely begin to see each other as obstacles to their own success. But the same result can occur with any use of rewards; introducing competition just makes a bad thing worse. Managers who insist that the job won't get done right without rewards have failed to offer a convincing argument for behavioral manipulation. Promising a reward to someone who appears unmotivated is a bit like offering salt water to someone who is thirsty. Bribes in the workplace simply can't work²

At issue here are three things,

1) Managing performance in people.

2) Finding a just financial compensation.

3) Finding the right remuneration package to attract and retain people with the relevant traits, values, behavior, and background.

These issues will have to be addressed, but the easy way out by declaring money to be the predominant motivator and therewith creating a bribe culture not only fails to work, as demonstrated above, it is also an incredible expensive way to achieve exactly the opposite of the intended purpose. Furthermore, even if only looked at from the ethical standpoint, the creation of a bribe culture should also be regarded as a rather deplorable business practice (BTW, the consequences of this practice are only too apparent.)

http://twc-consult.com/compensation.html