The Harvard Business Review [HBR] recently published an article, “Stop Paying Executives for Performance,” by Professor Dan Cable and Associate Professor Freek Vermeulen of the London Business School. The authors present arguments and analysis that incentives do not motivate executives to improve corporate performance. In fact, they argue that incentives might damage performance. The article uses the psychological and sociological literature to demonstrate that intrinsic factors [self-motivation, interest in the subject, desire to learn and be creative, etc.] are more important and effective in creating better performing companies than extrinsic factors—money, bonuses, direct rewards. The authors explicitly attempt to contradict the demonstrated success of the corporate executive pay model over the past three or four decades in motivating top executives to create literally trillions of dollars of shareholder value.
While this model has been of enormous benefit to the executives in leadership positions, it has also benefited millions of employees and shareholders plus the macro-economy. This opinion article will present logic and data to rebut the London Business School authors and demonstrate the incentive-based pay for performance model has substantial support from shareholders and the proxy advisory firms.
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May 19, 2016
The Harvard Business School is using this article in their “Making Corporate Boards More Effective” course.