Pay-for-performance plans are widely regarded as the smartest, most efficient way to handle employee compensation. Now two management experts say the programs are not only ineffective, they’re harmful.

Business school professors Bruno Frey and Margit Osterloh, writing on the Harvard Business Review website, say pay-for-performance programs “suffer from four inescapable flaws”:

• Things change so fast in today’s economy it’s impossible to figure out which tasks will be critical even in the near future
• Employees on pay-for-performance plans constantly game the system, spending a lot of their time trying to manipulate performance criteria in their favor
• The programs cause employees to spend all their efforts on the specific areas covered by their incentive plan, neglecting other crucial tasks, and
• Pure pay-for-performance plans tend to “crowd out intrinsic motivation and thus the joy of fulfilling work,” the authors say. That lack of personal motivation often kills innovation with an organization.

So what’s the alternative? Frey and Osterloh have a few suggestions. First, companies should hire people who really love the work — individuals who don’t see the biggest possible salary as their primary goal.

Second, they suggest paying a fixed compensation but then adding in periodic bonuses based on an employee’s performance over a long period of time.

Profit-sharing’s another possibility, they say, and awards and recognition programs can also heighten worker loyalty and commitment.

Frey is professor of behavioral science at the UK’s Warwick Business School and a professor of economics at the Univer­sity of Zurich. Osterloh is a professor of management science at Warwick Business School.

So what’s your reaction to the idea that employers should scrap pay-for-performance plans? Would such a move work for your company? Let us know in the Comments below.

Tags: Bruno Frey, Margit Osterloh, pay-for-performance