Originally found at MIT Sloan Management Review, by Jonas Solbach, Klaus Möller, and Franz Wirnsperger.
Compensation systems remain stuck in the past for several reasons. The first is, essentially, inertia: Companies have been using PFP for decades, and the best practices disseminated by compensation consultants usually derive from it. Additionally, most leaders are either not aware of the research on PFP or dismiss it as unreliable. Finally, leaving PFP behind and taking the leap required to design and implement a new compensation system can be a fearful prospect, given the potential impact on performance and results as a consequence of getting it wrong.
However, organizations may have more to lose by failing to move beyond PFP. We conducted a large-scale experiment with a target-independent compensation system. The results point to a strong business case for leaving PFP behind.
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