Sky-high salaries, enormous bonuses, truckloads of stock options and a variety of expense perks, we continually hear about these as part of the compensation schemes for executives (see Forbes listing for this year), and it certainly makes the rest of us salivate. These payouts are the direct result of compensation plans designed to drive corporate results, ones that allegedly benefit all stakeholders. Seeing the potential monies at stake certainly drives home the question: what might we do if we were in the CEO’s shoes?
As Pavlov taught us through his experiments with a dog and a bell, appropriately placed incentives can drive and condition behavior. The corollary to that, however, is what Steven Levitt and Stephen Dubner discovered and reported on in their 2006 best-selling book, Freakonomics and their 2009 follow-on, Superfreakanomics. In Freakonomics, the example of the teachers who helped students through the standardized tests by cheating, due to financial incentives, corroborates Levitt and Dubner’s point. They suggest that you need to look for the motivations and their underlying incentives; then the behavior will make sense. Levitt and Dubner paint a picture of a horse chasing the carrot tied to the end of the stick, but maybe it’s not that simple.
A recent article in BusinessWeek entitled The Dark Side of Incentives by Barry Schwartz caught my attention. Schwartz discusses how financial incentives can many times strip away moral considerations in the decision-making process. A study by James Heyman (University of St. Thomas) and Dan Ariely (Duke’s Fuqua School of Business), cited in Schwartz’s BusinessWeek article, showed that passersby were less likely to provide assistance lifting a couch from a van, if a token payment was offered. This example, along with others in the article, comes from Schwartz’s book, The Paradox of Choice: Why More Is Less. Key to Schwartz’s thesis is the idea that people are not only motivated by money; they also have a moral conscience and want to do the right thing. Unfortunately financial incentives can sometimes impair or cloud their moral imperative.
Levitt, Dubner and Schwartz have provided some interesting insights into the world of incentives and motivation. With what we know now, can we change executive compensation, eliminating the excesses we’ve witnessed and better balancing corporate objectives with those of other stakeholders? I’m not sure, but I’ve added Schwartz’s book to my list for Santa, hoping that it offers some ideas on prescriptions and remedies.