Executive Bonuses as For Me? and Why? Because
30th November 2009
The Wall Street Journal carries an opinion piece on executive bonuses (ban them!) in a nicely written and well argued essay. I’ll compliment the writer and spin off from it two powerful persuasion principles that form the backbone of the argument.
Both Wall Street and Main Street are concerned over the consistent poor correlation between executive compensation and company performance. (Please read more about this from your own search if you aren’t up to speed on this.) From a common sense application of For Me? and the well known principles of reinforcement theory, it should seem that the more incentives you offer people, the better performance you should get. Yet, this proven piece of persuasion science often fails to translate into practice. So, the science must be wrong, right?
No. People aren’t applying the science correctly.
As documented in a long line of research (which I’ve used in my Persuasion Guide and blog on frequently here), the combination of the For Me? of reinforcement theory and the Why? Because from attribution theory, demonstrates that just dropping incentives on people rarely produces the common sense expectation of “more incentive, better performance.” In quick review, when people, say executives, ask themselves, “Why do I do this?,” it is possible for them to answer, “Because of the bonus,” an external attribution and not, “Because I do good work,” an internal attribution. This difference tend leads to predictable motivation differences.
People in general and highly paid executives in particular are likely to form stronger external attributions when incentives are aimed at products – outcomes, goals, end states, etc. – rather than processes – methods, procedures, habits, etc. Stated another way, if you get rewards for getting gold, you’ll tend to go external whereas if you get rewards for making gold, you’ll go internal. Thus, incentives that focus people on what they do, how they do it, how they monitor and control their actions, in other words the Process, the incentives will tend to lead people to say, “I do it because I want to.”
Thus, the combination of For Me? and Why? Because explains both why the problems with executive incentives exist and why the common sense expectation is wrong. The folks providing the incentives do not understand reinforcement and attribution fully. And, it is not that tricky. Goodness, this isn’t Rocket Science, Brain Surgery, or Climatology. But, it does require considering the persuasion psychology a bit more closely.
I would therefore tend to disagree with the opinion writer’s argument that we should ban executive compensation. Rather, it is possible and likely that targeting compensation to the desired process of the company, the day in and day out methods, habits, and procedures instead of products like stock price or profits, would lead to better executive performance.