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No, this is not an ironic critique of current pay budgets or of corporate performance, in general, in the current economy.  Rather, I am seeing several signals suggesting that the pay for performance model that we’ve touted in the past might need a serious makeover.

First, there’s the research in behavioral economics.  In Drive, Daniel Pink explains how the old operating system of motivation (carrots and sticks) isn’t compatible with contemporary business.  In the industrial age, the focus was on routinizing tasks and getting them done quicker and cheaper.  Meanwhile, in today’s creative age, rewards can transform interesting work into drudgery.  The reward itself can signal to the individual that the work is not enjoyable.  It stamps out the inherent intrinsic motivation and creates reward addicts.  With the problems of today’s world, we need more creative and strategic workers, not cogs in a machine.

In Linchpin, Seth Godin also describes this new world of work and how today’s organizations need people who bring humanity, connection, and art to their work.

Meanwhile, Daniel Kahneman (known as the inventor of behavioral economics) recently spoke at TED about happiness.  He had some good data that indicates a certain threshold after which money does not affect happiness.  And it is not particularly high.

Second, there’s a push in many leading organizations to re-frame the performance process – focusing on developing individuals for the future, rather than rewarding the past.  For example, many of the customers I speak with are purposely separating performance discussions from compensation discussions.  Performance appraisals of the past (tied to a score and dollar amount) have been found to be de-motivating and not particularly good at increasing performance (which is the point, right?).

So what does all this mean? Should we eliminate the compensation function altogether?  Figure out fair market pay and ignore the rest?

No, but we need to rethink our “signals” with regards to compensation.  Here are a few suggestions:

• Let’s make sure we’re not disincenting our talent via compensation.  We need to figure out what that threshold (happiness/engagement) is and make sure everyone providing any value is paid to that level.
• Let’s only pay performance-based incentives for activities that we deem routinized and, frankly, unappealing (yet are necessary and important).  We need to be honest about what the incentive signals and what kind of behavior will result.
• Let’s reward creative and “linchpin” behavior with more opportunities and lots of appreciation.

Have I gone mad?  Maybe … but it’s hard to ignore some of these signs.  Fire back with opposing arguments.