American International Group, Inc. (more commonly known by its acronym, AIG), has come under fire for issuing $165 million in bonuses, shortly after receiving upwards of $180 billion in funds from the federal government to keep the struggling insurance corporation from collapsing. (1)
Of course, it’s not alone. Mammoth retention bonuses are common in the financial services industry. Another bailout beneficiary, Fannie Mae, announced that four top executives would be receiving retention bonuses of $1 million or more. (2)
Without adding to the cacophony of voices criticizing AIG, Fannie Mae, or other instances of executive compensation run amok, I’d like to talk a little about how motivation works. Bottom line: it’s all about motivation. But does pay alone maximize motivation?
Intuitively, we understand that motivation is important for performance, but we mostly think of motivation in terms of quantity–how ‘much’ we have. Yet research has shown that the quality, or type, of motivation is also important. The ‘why’ of what we do, it turns out, makes a very big difference in both what we choose to do and how well we do it.
When we are motivated by intrinsic goals and desires–to learn something new, to do a good job, to fulfill our potential–we are more persistent and more effective. On the other hand, extrinsic rewards such as money and fame, while powerful, are mercurial. When they leave, so can one’s motivation to perform well. Over time, extrinsic motivations–like money–can actually undermine our intrinsic motivations.
If this sounds like an argument for abolishing bonuses, it isn’t. Compensation is a critical component of any job, and is something to be considered seriously when trying to retain top employees. However, it can’t entirely substitute for a positive, fulfilling work experience. Employees’ long-term commitment and performance are ensured only through a combination of the two. If a company makes the mistake of treating compensation as a cure-all, it could wind up having neither the requisite money nor the positive work environment necessary to retain top employees during an economic down-turn.
Setting aside any justifiable moral outrage, these recent events have allowed us to ask an important question: have corporations such as AIG and Fannie Mae become overly reliant on compensation to make up for short-comings in their corporate culture? Is there something that they are missing in their understanding of how competition works in the marketplace?
I’d love to hear your opinion.