One of the myths of executive compensation is that the most effective way to motivate people to work productively is through individual incentive compensation (Pfeffer, 1998). While most people agree that money cannot buy everything, in organizations there is a widespread belief that money plays a major role in motivating people. Organizations spend a lot of time, effort and money in designing and implementing the right performance management schemes and incentive schemes to motivate their executives. It is accepted as a matter of fact that if only we could measure desirable behaviors and reward individuals commensurate with their results then all our motivational problems would be solved. But what is the truth of this statement? Are monetary rewards and incentive systems a panacea for all motivational issues? While money may definitely help attract and retain talented people, we have reason to believe that monetary incentive schemes may also have some undesirable effects on morale of employees. Kohn (1993) argues that monetary rewards only secure temporary compliance and do not build any long term commitment or lasting behavioral changes in people. According to Meyer (1975) the basis for most of the problems with merit pay plans is that most people think their own performance is above average. Since no plan can give a positive feedback to all persons, it threatens the self-esteem of individuals. People cope with this by demeaning the importance of the job or by derogating the source of the reward. This paper explores the origins of our belief in the motivating power of money and some of the undesirable effects of monetary incentive schemes for executives. We start by trying to understand some of the fundamental assumptions which make us believe that money is a motivator, then we look at some objective evidence on the motivational power of money and finally we focus on some of the dysfunctional effects of relying on money as a... [continues]
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