“Employees act in their own interests. That should be the starting assumption of anyone designing an incentive scheme. The task for employers is not to weed out greedy employees. It is to create incentives that make employees' interests the same as their employers', so that when they do what is best for themselves they also do what is best for their employers.”
Even if we accept that ‘Employees act in their own interests’, which is a big assumption in itself, I think he’s missed out a vitally important bit of info here. What are ‘their own interests’? I think it isn’t as simple as material/financial self-interest as seems to be taken as a given here. If it were then the idea that we need to pay people who are amongst the richest in world even more to keep doing their job would be laughable. These people clearly do not need (in a financial sense) the extra bucks. Something else is going on.
I think that when you are talking about people at the top, variable pay is not an incentive, it’s a symbol. For some this is vanity - how much does the company love me? For many (most?) it’s probably about recognition of their talent and relative position - how much more do they think I am worth than my equivalent at another company? But if that is the case then aligning shareholder and manager interests should really focus on how to address these psychological factors, rather than just chucking money at the problem.
Funnily enough I was at an event this week where a remuneration consultant said that, in her experience, directors did not respond to short-term incentives that might encourage risky behaviour, even though they could financially benefit. They still did the ‘right thing’. That is clearly encouraging but also surely serves to undermine the idea that we respond mechanistically to financial incentives?
More broadly it is obvious to any one of us that many people who do well at work are not motivated by financial rewards. Maybe they are especially conscientious, maybe they have an engrained desire to see things done properly, maybe they just enjoy hard work. These people do not need incentivising to do the right thing (though they may view a bonus as recognition).
You also get many, many people who choose to take less money for more job satisfaction. And you get people who work for organizations because they believe in the values that they extol. I believe that this is in fact acting ‘in their own interests’. But how does this fit with Mr Clear Thinking’s leap to financial self-interest? Errr… it doesn’t. The definition is simply (and obviously) too narrow to capture why people do things and thus (the point of the article after all) how we might encourage them to do the ‘right’ things.