A lot of companies seem to misunderstand the role of pay in hiring and retaining smart people. In my first year at Microsoft Research I listened to a (normally sensible) member of the lab’s leadership team explain that the bonus structure was there to incentivise good research. I looked around the room and wondered who had ever thought ‘well, I was going to do some mediocre research, but for 20% more money this year I will do something world leading!’ My guess: no one.
If you want to hire the best people, you are looking for the people who, if money didn’t matter, would do the job for free because they believe it’s important and care about the outcome. You don’t pay them well to persuade them to work. You pay them well so that they can afford to work on the things that they think are important. If smart people don’t think the things you’re doing are important then you should consider why you’re doing them.
This is especially true for executive compensation. The best CEOs are ones that care about the company’s products and want everyone to use them, not the ones that want to make the most money. This is especially true for non profits where your pool should start with people who care a lot about the organisation’s mission. Paying more (above a certain level) won’t find more of those people it will simply dilute the pool with people who are there for the money, not the mission.
EDIT: A lot of people seem to be misunderstanding this and think this is an argument to pay people badly. It absolutely isn't. If you pay people badly, they will spend a lot if time thinking about money. Your job as a manager is to remove problems. Money removes a lot of problems. But a lot of problems cannot be removed by applying money. If someone competent is being told to do nonsense work that they know will cause problems in the long run, no amount of money will make them motivated. The problems that can be solved with money are the easy ones.
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