Why Pulling Executive Compensation Is Not a Good Motivational Tool

Every few weeks, it seems another CEO voluntarily (or involuntarily) takes a pay cut for the greater good of his or her company. Since the financial crisis of 2008, this practice has become increasingly common.

Amid the crash, researchers began searching for correlations between high salaries and risky behaviors. They concluded that pay cuts could indeed prevent high-risk decisions, and as a result, 373 U.S. companies elected to slash executive salaries.

Now, involuntary pay cuts are commonly used as forms of motivation. When companies aren’t thriving at optimal levels, their boards of directors choose to decrease CEO salaries. By doing this, directors intend to ignite fires in their CEOs, boost their productivity, and urge them to earn back their higher levels of pay.

There’s no question many American CEOs have overinflated salaries, but it’s important to explore the effects that involuntary pay cuts have on the psyches of these individuals and their respective companies.

“It’s important to explore the effects that involuntary pay cuts have on the psyches of these individuals and their respective companies.”

The Science Behind Motivation
The psychology of executive reward structures through incentive-based motivations and pay cuts has roots in operant conditioning, a psychological tactic used to encourage or discourage behaviors. It’s a form of control similar to the carrot-and-stick approach—it entices people to act certain ways by taking things away from them that they’ve grown accustomed to receiving.

Many studies have been conducted on operant conditioning, but no one can agree on a universal conclusion. While a 1999 meta-analysis surmised that these tactics negatively influence intrinsic motivation, a 2001 study found a positive correlation when rewards were based on performance and not given ahead of time. A similar 1994 study split the difference by finding little correlation one way or the other.

From a psychological standpoint, this carrot-and-stick methodology of negative reinforcement is less helpful than we think. Pay cuts as punishments negatively impact our brains after we experience them (and when we anticipate them).

When a human anticipates pain, the region of the brain that activates during an actual painful experience “turns on” and has a major impact on the person’s psyche. It’s been well established that the brain’s anxiety center and thinking regions are intimately connected, and studies show that overstimulation of the anxiety center disrupts risk assessment, decision-making, and innovation.

When executives live in constant fear of punishment, their brains are actually working against them as they try to improve their performance.

What Should We Do Instead?
Based on research and psychology, many factors should be taken into consideration when determining how to adjust executive pay to improve performance:

  • Don’t assume that decreased pay will have the same motivational impact on everyone. Assess this tactic on an individual basis.
  • Make punitive decisions with all parties in mind. Executive pay cuts affect more than just executives—entire companies will feel the impact.
  • If you wouldn’t feel comfortable using this tactic on entry-level employees, certainly don’t use it on executives.
  • If you do cut someone’s pay, don’t banish him or her to the dunce’s corner—make sure you continue to provide support and motivation. Balance out the pain of negative reinforcement by simultaneously rewarding in other ways.

The evidence surrounding the pros and cons of cutting executive pay is largely inconclusive, but from a psychological perspective, it’s safe to say this method could very well do the opposite of its intended outcome. Bogging down executives with fear and anxiety occupies their prefrontal cortexes and prevents their expertise and motivation from kicking in.

Based on this information, there is no clear rationale to cut executive pay in an effort to boost productivity. We shouldn’t allow our gravitation toward financial envy, malicious joy, or schadenfreude to cloud our judgment.


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