Beyond the carrot patch: motivate thyself

file0001229562991 Since the financial meltdown of 2008 there has been mounting public criticism of executive compensation in the US, especially in contrast to the pay of front line workers. (Today the disparity in income from the highest-paid executive to the average-paid worker in Fortune 500 companies is an ASTOUNDING 354 to 1.) Outsized CEO bonuses are probably the most controversial part of the equation. But while there is debate about whether those bonuses are merited, there is an absence of debate whether bonuses are useful motivators at all! I've reprised an older post to address this.

One of SO many things that the best rock groups can teach us about team performance is the value of self-direction.

Most of the top bands—from the Beatles to U2 to Green Day to the Dixie Chicks—have operated with a maximum of personal autonomy. No one was (or is) peeking over their shoulder, micromanaging them, directing them what to write or how to play.

This is helped by the fact that bands usually hire and fire their managers, not the other way around, which makes it abundantly clear who works for whom.

The importance of personal autonomy was brought home to me again reading psychologist Edward Deci's 1995 classic "Why We Do What We Do: Understanding Self-Motivation"—based on decades of research by himself, colleague Richard Ryan, and others.

Their experiments overwhelmingly confirmed a significant (and heterodox) proposition: under most conditions individuals and teams operate best when motivated by intrinsic values and worst when motivated by external controls and contingent rewards, including monetary bonuses. ("Contingent" means "IF you achieve X, THEN you'll be rewarded"—the classic "carrot" approach.)

Granted, it's important for workers to have sufficient—and equitable—baseline pay so that the whole issue of compensation is off the table. But additional financial incentives—contingent "if/then" rewards such as cash bonuses—are not useful motivators except for grunt work or tasks deemed undesirable.

To achieve outcomes that require some resourcefulness, intuition, or creativity, external controls and rewards are usually a bad idea—narrowing people's focus, blinding them to outside-the-lines solutions, encouraging them to take shortcuts, and compromising any long-term benefits that aren't rewarded by short-term bonuses. (Wall Street provides us ABUNDANT examples, including a quarterly-earnings obsession.)

Dan Pink in his 2009 bestseller "Drive: The Surprising Truth About What Motivates Us"—which pulls in dozens of additional field studies by behavioral scientists, sociologists, and economists—comes to a similar conclusion: "The science shows that the secret to high performance isn't our biological drive or our reward-and-punishment drive, but our third drive—our deep-seated desire to direct our own lives, to extend and expand our abilities, and to live a life of purpose."

Unfortunately in our business organizations, management—by virtue of its reliance on carrot-and-stick controls—pursues compliance at the expense of engagement, while undermining and weakening intrinsic motivation. In Pink's words: "This era doesn't call for better management. It calls for a renaissance of self-direction."

So while a disruptive world economy—especially the Creative Economy—demands from us more energetic, imaginative, and innovative performance our businesses (and our schools) too often incentivize the opposite.

No wonder many of us rely on rock & roll for daily inspiration! (Also, I'm here to tell you that managers of rock bands don't earn 354 times what band members earn.)

Here's a terrific video, animated by RSA, that illustrates Dan Pink's findings.

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  1. The stats on the income disparity vary. Some reports put the ratio at 200 to 1. But the Wall Street Journal says 17 to 1.

    1. Yes, I've seen very different numbers depending on what you're sampling. I used the ratio for Fortune 500 companies—for the ones that published their ratios. It could well be higher than 354 to 1 if we saw ALL the numbers for the 500 biggest firms, but we don't know. And the numbers are much worse for highest paid executive to LOWEST paid worker (instead of AVERAGE paid worker).

      The Wall Street Journal sample included ALL chief executives, which could include those running a company of three. The ratio they quoted in the article was actually 5 to 1! But that's smoke and mirrors. Nobody's griping about pay disparity at small start-ups, for instance, or a family dry cleaners. They quoted a Bureau of Labor Statistics number of $178k for the average chief executive! How many chief executives of even a 10-person firm make that little? The 354 to 1 number probably understates the discrepancy in the big firms.

  2. As a footnote to the post, when Ron Johnson got a compensation package upon his departure from J.C. Penney, it was reportedly worth 1,795 times the average wage and benefits of a department store worker. Now I’m sure Mr. Johnson—who left behind a brilliant and lucrative career at Apple to take the job—worked very hard for his money. And I bet he stayed late everyday. But still…that’s quite a pay gap.

    Of course he’s paid for the results he produces not the hours he logs. But he left after 17 months because he drove J.C. Penney’s business into the ground. Imagine what he might have earned if he had been successful.

    1. That's what gets me the most: those who fail, utterly, by any standard, and are rewarded with enough cash to live out their lives in luxury.

      I would have run JCP into the ground for 10% of his paycheck. Hey, I might have even accidentally helped the company.

      Money, beyond certain basics, quickly becomes a blight on the better bits of human nature. Money is not the root of all evil. The wrong attitude toward it grows all kinds of bad fruit.

      1. "I would have run JCP into the ground for 10% of his paycheck." Wow, that's a great idea for how I can better market my consultancy. "I can shrink your business for 10% of what you'd pay for a big-name CEO." That frees up 90% to spend on retirement bonuses for the other executives." I think consultants should make bold promises.

  3. The published numbers on which these statements are based are spongy at best. The stock options that are granted are at the market price at the time of the grant. That's a fixed value for the calculation going forward. It's not static and that's the problem with the number. The real benefit to the shareholders is that the optionee benefits from an increase in the share price and that's good for the common stockholders. Unfortunately, the number is not very reliable for precise comparisons. And it's recognized by the recipient as ordinary income so no tax breaks.

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