When Incentive Pay Isn't Enough

Performance-based compensation might motivate some managers more than others.
More firms are offering their managers incentive pay as a catalyst to improve work performance—but how effective is the practice? As it turns out, performance-based compensation might motivate some managers more than others, according to the co-authors of an upcoming study. They include Joyce Cong Ying Wang, a doctoral student at the Jindal School of Management at the University of Texas at Dallas, and Daniel Han Ming Chng, associate professor of management at the China Europe International Business School in Shanghai.

The two researchers examined differences in characteristics among managers—most specifically, their career ambitions and task attention. They did so within the context of a computer simulation, where they posed questions to part-time MBA students who had assumed the role of managers making strategic business decisions.

The researchers found that study participants who described themselves as having higher career ambitions were more attentive to the tasks before them, and in turn were more motivated by incentive pay. Those in this group who received incentives also took more risks in their decision making than those who described themselves as less ambitious. Such ambition-driven managers, Wang explains, “tend to invest more strategically, and they also are more likely to change strategies.”

The study also found that the effectiveness of incentive pay was inversely related to company performance: The better a company’s performance, the less incentive pay motivated managers to take strategic risks.

To reap most benefit from performance-based pay, the researchers advise, organizations might want to tailor their compensation packages more carefully, which might include offering incentive pay to their most ambitious managers. If their companies are growing, thereby making incentive pay less effective, leaders must know their managers well enough to choose more motivating alternatives.

Their paper, “An Experimental Study of the Interaction Effects of Incentive Compensation, Career Ambition, and Task Attention on Chinese Managers’ Strategic Risk Behaviors,” is forthcoming in the Journal of Organizational Behavior.