Page 120 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

106 The Complete Guide to Executive Compensation

or the 80-20 principle, avowed by some, is an extension of this philosophy. It states that
80 percent of the desired output can be achieved with 20 percent of the available effort.
Anything beyond the 20 percent effort is achieved at a diminishing rate of return.
Some argue that pay does not motivate individuals to work harder. For some, that may
be true. Their own need to succeed may be the driving force. However, motivational incen-
tives should not focus on working harder, but rather on working smarter, achieving desired
results within a prescribed time frame. As such they will reward success and penalize failure
(by withholding pay). The belief is that individuals will repeat behavior that is rewarded and
will eliminate actions that are penalized. If there is a focus on the process rather than the out-
come, it is on working smarter rather than simply harder. Some make the distinction between
intrinsic and extrinsic motivation. One could argue that the best of all worlds is to have both.
Intrinsic motivation is when the work is the reward because it is satisfying. This may be desired
because of a need for an expensive lifestyle per se or as a status symbol to others. More than
one CEO has scanned the proxies of other companies to see where he or she stands in the
financial pecking order. Extrinsic motivation is when the work is seen as the way to achieve
the desired pay.
Equity vs. Expectancy. Traditionally, the motivation of pay is explained by two formulas:
equity and expectancy. The equity theory states that the individual will increase level of
performance if level of pay is believed greater than output and, conversely, will decrease
performance if level of pay is believed below current performance. Most people will argue
that the latter alternative is more plausible than the former. However, it seems that the
performance of many sports stars falls, rather than increases, after receiving contract sums
that would feed much of the world’s impoverished. Of course, the executive who believes his
or her performance exceeded the level of pay would first attempt to obtain a pay increase;
only if this effort failed would the individual lower performance or, more drastically, leave to
accept another job.
Expectancy theory suggests that an individual will increase output in the expectation of
receiving an increase in pay. Sports stars often seem to have their best season the year their
contract is expiring. For executives, it could be an increase in pay for performing current
responsibilities or a promotional increase commensurate with a job reclassification. If the
individual does not receive an increase consistent with the level of performance, the
person (operating under the equity theory) is again likely to reduce performance or seek a
different job.
However, the level of pay can be either a “carrot” or a “stick.” The carrot symbolizes
higher pay, held out to motivate the individual to work harder. The stick, on the other hand,
is a negative symbol, meaning, “Do it right or we’ll find someone else.” Logically, the
carrot works best until the individual’s compensation has risen to a level where additional
pay no longer has the same motivation, and then the stick takes over. The executive is thus
encouraged to continue a high level of performance in order to keep the job and the high
level of pay.
Executives typically wear the hats of both subordinate and superior. As subordinates,
they are very vocal about the need to equitably link pay and performance; as superiors, they
often become defensive and describe the problems of adequately relating pay to performance.
Obviously, this dual standard is inappropriate. Part of the problem is that executives are
often poorly trained in identifying and discussing performance problems with subordinates.
The result? To avoid unpleasant discussions, many performance ratings are artificially raised.