ESRI Geary Lecture: “Is Pay-For-Performance Effective?”

The second Geary Lecture of 2010 will be given by Professor Canice Prendergast, W. Allen Wallis Professor of Economics at the University of Chicago Booth School of Business.

Venue: ESRI, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2
Date: 25/11/2010
Time: 4 p.m.

For the last couple of decades, there has been a large body of work arguing for the widespread use of pay-for-performance as the appropriate means of aligning the interests of workers with those of their employers. This lecture outlines recent contributions to this body of work, and focuses on a number of general themes. First, the successes of pay-for-performance schemes are limited to a small class of agency settings that do not seem to generalise to other settings. Second, the literature has now begun to consider instruments other than pay as the most natural way to align interests. Finally, there is controversial literature in psychology that now challenges the basic assumptions of this strand of economic literature. The talk will review all these recent contributions, and likely directions for future research.

Canice Prendergast, who was a research assistant at the ESRI from 1983 to 1985, is now one of the world’s foremost researchers on workplace incentives and their impact on productivity. He is currently the W. Allen Wallis Professor of Economics at the University of Chicago Booth School of Business.

The Geary lecture is organised each year by the ESRI and honours Dr R. C. Geary (1896 –1983), the first Director of the Institute.
This is one of the special events being held during 2010 to mark the Institute’s fiftieth birthday.

Attendance at the event is free but must be pre-booked. There are a limited number of places available and early booking is encouraged. To book a place, please send details of attendee’s name, organisation and contact telephone number by email to

18 replies on “ESRI Geary Lecture: “Is Pay-For-Performance Effective?””

It depends on what kind of performance you’re paying for.

If you’re paying people to increase their “stats”, then the stats will be “juked”. For example, if you pay hospitals/doctors for the numbers of surgeries they perform, then they will increase the number of, say, bunion removals or other minor surgeries. Not what you wanted, but technically what you asked for.

Similarly, if you pay the Gardai for the number of traffic tickets they issue, they will start issuing tickets for going 32 in a 30 kph zone and the like. Not what you really wanted, but again technically what you asked for.

And of course if you pay Bankers to throw money out the door, that is exactly what they will do.

In effect, pay for _metric_ performance turns institutions into factories for producing numbers. This whole concept of obsession with numbers and stats and its dysfunctional influence on society is discussed at some length in Adam Curtis’ socumentary Thre Trap.

No look at our government, consultants, professors and judges all paid at least double what they are paid in the U.K.. If they were half as effective we would all be delighted. An arrogance and inflated sense of self worth inhabit these people and they cant even make a cup of coffee. I think we should have a new law on pay over a 100k. The effectiveness reduces at the square of the pay. Also in Ireland people over 100k do not have to pay for public services like the rest of us as there are so many FF tax dodges written into the fiscal code.

” Finally, there is controversial literature in psychology that now challenges the basic assumptions of this strand of economic literature.”

What sort of points is this literature making? Can you point me in its direction.

Excellent book by Alfie Kohn: “Punished by Rewards”
Well referenced, includes extensive research from many areas.

discusses internal motivation vs external motivation

cites research showing that external motivation/manipulation (money, praise, etc.) produces short-term rewards and only in limited contexts (e.g. assembly line)

assumes reasonable pay & respect; agrees financial compensation is one element to consider–but only part of the equation.

discusses numerous contexts (different kinds of work; management; schools/learning; family environment)

Highly recommended.


“internal motivation vs external motivation”

The really smart employers get YOU to pay THEM. Remember the Tom Sawyer episode where Tom makes his punishment of painting the fence so attractive that the other boys queue up for the privilege?.

Could we try this out on the Irish Civil Service?

Starting salary minus 10000 euro per annum, up to minus 100000 at end of career. Fun job. Mainly involves whitewashing.

@ Niall: Dan Ariely, (Professor of Psychology and Behavioral Economics at Duke University) expalins this one a bit more in one of his chapters in “The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home” – well worth a read

From what I recall, rather than having the standardly assumed economic effect of encouraging good performance, large bonuses actually contribute towards worse performance, as there is so much stress/pressure to perform in order to justify said bonus. These findings are backed up by experiments done in rural India, by Indian PHD economics students. The same people were made to perform the same tasks for different bonuses. A small bonus was around $, roughly a days wages, medium bonus of around a week’s wage and the large bonus was equivalent of the avergae yearly wage. Those who performed best were the ones who got the medium level bonus.

He explains it much better than me but that’s the ladybird version.

I recall a couple of decades ago – probably more than that thinking about it – when performance related pay was gaining popularity, a friend of mine (HR consultant) told me that it was a very easy concept to sell into the workforce of client companies……. because 90% of the employees thought they were in the top 5% of the performers.

“(HR consultant) told me that…90% of the employees thought they were in the top 5% of the performers.2”

He should have also told you that 95% of the statistics quoted by HR are made up on the spot ..:-)
Excellent video – shows what is patently obvious to anyone who has ever worked with performance related pay systems. All it does is generate a small sub-industry of metric manipulation at the lower middle end, and at the upper level, management who justify their bloated bonuses by claiming that “paying peanuts gets monkeys”. Yes not generally imaginative enough to replace that cliche. A good rule is that the more overpaid they are, the more in favour of pay related performance.

I saw a CNBC interview with the CEO of Abbott Laboratories some while back and he was asked about his $30m salary in the previous year.

He arrogantly said that he had one word for it: performance!

I recall Brian Goggin making the same point about his annual earnings of €4m in a year in which he put the Bank of Ireland on the road to ruin.

Onely a small number in any group have the ability to make a difference and the true long-term test usually is in handling adversity, not riding on the waves of a boom.

Pay for Performance has a different feel when it is being used to justify high-level exec. salaries, compared to when it’s being used as an ongoing measuring tool for lower level staff.

I don’t think either situation is appropriate or effective.

In the case of upper level staff / exec. pay what are the metrics? Is it short-term gain or profits? How specific are the metrics for upper-level pay, compared to metrics used for assembly-line performance? And is the exec or upper level staff at genuine risk of not making their bonus or salary? (And if not, then the same advice as per Garry-referenced video applies–bonus incentives for performance actually reduce performance.)

The point I’m making is, how is “performance” defined, is it defined ahead of time or not? And is it meant as an incentive (is there real risk of not attaining–already shown to be ineffective by research), or, as I suspect, as an after-the-fact lame justification?

If we ask for a bailout from the EC/IMF; does this ensure that all existing bond holdings will be repaid?

If so why is the expected borrowing rate for a bailout not acting as a ceiling on interest rates.

Saying that people are driven by financial reward is like saying that a jockey rides horses, and then showing a picture of a jockey riding the word horses. Money is a proxy for the things you get from it, which are diverse & usually much more intangible than we seem to assume.

Things like social capital, the approval of peers & family, an easier more placid life (sometimes).

We can also afford more products & consumables, which makes us more free, but those are not as significant as motivators in themselves as we assume. New purchases also have significant elements of social capital. Look at the salesman that buys a new car every year. He does this regardless of whether he needs a new merc/BMW/audi. He does this because sends a message to his peers that he has been successful in the last year and can afford it. This keeps him closer to the centre of the social solar system, where the next opportunities tend to gravitate. Why do yee think those people talk about eachothers cars so often!?!

These motivators are efficient and fit logically with our communal evolution. Money has no place in our natural evolution, in itself.

This might seem self-evident, but it has the ramification that none of these motivations (except for the new merc) and intrinsically dependant on money. You can get them all in a society that values money less than real tangible things like hard work & moral considerations, etc.

But money does not improve performance unless due consideration is given to the real motivators and how they relate to the actual job description (which is a whole other thesis).

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