Incentive plans always go awry

By Philip Brewer on 27 March 2008 (Updated 26 April 2010) 16 comments
Photo: Finsec

Ever worked someplace that had an incentive plan (as in, "Hit these targets and you'll get a bonus")?  Ever been a manager whose job it was to administer an incentive plan?  Ever tried to create an incentive plan, hoping to get people to do more of what you want them to do?  Here's a little tidbit for you:  Incentive plans always go awry.

I don't mean to say that incentive plans don't work.  They just never do what you want them to do.  Here's why:  They replace intrinsic motivation with extrinsic motivation.

Intrinsic and extrinsic motivation

Ever seen a kid try to learn how to do something he wants to be able to do?  (For example, learn to beat a level on a video game or learn to jump a skateboard up onto a wall?)  If so, you've seen intrinsic motivation.  I've seen kids spend hours, doing the same thing over and over again, until they get it right.  People offering bonuses have seen the same thing too.  That kind of concentrated hard work is what they're trying to get, only they want it focused on their project.

They're never going to succeed, because only intrinsic motivation does that.

That's not to say that extrinsic motivation doesn't have an effect.  Offer a bonus, and people will try to get the bonus.  But observe:  Their motivation is not to accomplish your goal--it's to "get the bonus."

Incentive programs and metrics

Any kind of incentive program has a metric--the thing that you're measuring to decide whether someone gets the bonus.  For salesmen, it might be a target number of sales.  For the quality-control guy, it might be keeping the number of bad units below some level.  For a corporate executive, it might be some level of return on investment.

Whatever metric you pick, though, it will be something that can be gamed.  A salesman can sell more units a dozen different ways:  

  • He can stop pushing a single right-sized unit and start getting customers to buy two or three smaller units.
  • He can make aggressive use of financing to sell units to people who can't afford them.
  • He can stop providing support for his old customers and spend all his time chasing up sales to new customers.
  • He can make wink-and-nod deals to "sell" units with the understanding that they'll be returned next quarter.
  • He can kick back a fraction of his bonus to purchasing agents who buy what he's selling.

Now, the head office can thwart any of these moves.  It can change the bonus metric from number of units to number of dollars in sales or number of dollars of profits.  (Then the salesman puts all his effort into selling the most expensive or most profitable units.)  It can delay credit for vendor-financed units until the bill gets paid.  (Then the salesman stops using vendor financing even for customers where it makes sense.)  It can mandate a certain amount of time spent supporting existing customers.  (Measured how?  Answer:  According to some metric that the salesman can game just as easily.)  In fact, it can spend all its time fiddling with the incentive plan, to the point where the head-office folks don't have time to do their own jobs--but nothing it can do will keep employees from gaming the metric, and nothing it can do will produce intrinsic motivation. 

The point is that, under an incentive plan, everything is worse.  Everybody's focused on the metric, and nobody's focused on doing the work that needs to get done.

Notice what the underlying assumption is:  that the employees haven't already thought about what's best for the company and what's best for their customers.  That their intrinsic motivation is something other than doing a good job.  Some employers no doubt have plenty of disgruntled, unmotivated employees just there to pick up a paycheck for the least work they can get away with--but the answer to that problem is figuring out what's gone so terribly wrong with the business.

What to do instead

Whenever I point out that incentive plans make things worse, people always say, "But what should we do instead?"

Of course, just asking the question shows that you haven't grasped the essential point:  Incentive plans make things worse.  It's like whacking yourself on the foot with a hammer.  The first thing to do is to stop.  Once you've done that, you can focus on aligning employee's intrinsic motivation with the firm's business needs.

First, think for a minute about what people's intrinsic motivations are.  My own experience is with software engineers.  They're strongly motivated to:

  • do new, cool stuff with the latest technology
  • do work that's worth doing
  • gain the respect of their peers

Clever managers can use that to get employees to do what needs to get done.  (For example, by making sure that every engineer gets to do some new, cool stuff, by not assigning pointless work and making sure that engineers understand why a task that might seem pointless is worth doing, and by making sure that everybody gets to see some of what their coworkers are doing.)

Most managers, though, have a different focus.  They're too busy "managing" to have time to explain why the pointless work is worth doing--to them, it's worth doing because senior managers assigned it--and the new, cool projects go to key employees, because they're high-visibility, must-succeed projects and putting a junior engineer on it would be too risky.

ARTICLE CONTINUES BELOW

With intrinsic motivations out of the picture, managers have to fill the gap with extrinsic motivations--praise, raises, promotions, and bonuses.

It's important to note that there's nothing wrong with any of these things--managers should lavish their employees with all of them.  What's wrong is using them as an incentive.  As soon as you do that, you've got your employees trying to hit the metric, rather than doing what needs to be done.

Minimizing the harm

Even though the harmful effects of incentive plans have been known for a long time, and the harm has been throughly documented--See for example, Punished By Rewards: The Trouble with Gold Stars, Incentive Plans, A's, Praise, and Other Bribes by Alfie Kohn--they haven't gone away.  How then can we minimize the harm that they do?

For managers

First, remember that the harm is done by having an incentive tied to some metric.  It does no harm to pay people for their work, nor does it do any harm to offer a bonus that isn't tied to an incentive plan.  For example, a profit-sharing plan does no harm, and is often a good idea for everyone involved.  (It means that the employer can lower payroll costs during bad times without having to lay people off or cut salaries.)

Second, if you have to have a metric, make it something that employees have no control over--total profits, for example.  This will be de-motivating, of course--employees will be frustrated at having a bonus plan that's essentially a lottery ticket--but not as bad as if all your employees are spending their time trying to hit the metric.

Third, if you have a bonus tied to a metric, keep the bonus as small as possible.  That way your employees can continue to follow their intrinsic motivations to do a good job without feeling like chumps for not gaming the bonus system.

Fourth, don't set your employees up to be competing against one another.  You want your employees to be collaborating.  Putting them in competition for a bonus is exactly the wrong thing to do.

Fifth, don't waste time trying to come up with a metric that your employees can't game.  It's impossible.  Unless their job is absolutely trivial, it will always be easier to maximize the metric than to do a good job.  Any effort you put into creating a perfect metric is wasted effort.

To the greatest extent possible, though, avoid incentive plans.  If your business has any kind of reasonable structure, your employee's intrinsic incentives are already aligned with the business's interests.  (If they aren't--if your employee's natural inclinations to do work that's worth doing and to do it well doesn't lead them to do what you need done--then that might be a good place to focus your managerial efforts.)

For employees

I don't actually have much useful advice for employees suffering under an incentive program, except to try to find employers where the incentive programs are small and the target metrics are out of employee's control.

Really, your natural inclinations are going to be the right ones.  If the bonus is small enough to be ignored, just ignore it and do your job.  If the bonus is so large that you can't ignore it, put in whatever effort it takes to get the bonus, and then spend the rest of your time doing whatever you should have been doing.  But you knew that already.

Everybody should read Alfie Kohn's Punished By Rewards. It will change the way you think about incentive plans--and change it for the better.

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Guest's picture

My experience, while working for a health care provider for 3+ years, is that incentive plans based on specific metrics handcuffs both the manager and the employee. Since reviews were performed yearly and being that I worked in a faster moving IT department, reviewing the annual benchmarks were either found to be yesterday's news or projects that were swept under the rug due to business concerns. It did not keep pace with an ever changing business and technical environment.

I distinctly remember that one year I 'exceeded expectations' for 8 out of 8 total performance metrics or goals. The result? A 4% raise from my current salary. I laughed when I received the letter (from a manager I hadn't even heard of) because it seemed more like a COLA than a raise. Oh well.

Guest's picture

I worked for a software firm that pushed tech support quality-control and quality-rating goals hard, all year long, with the incentive of significant bonuses for those teams that met or exceeded high standards of quality.

The result? Every department exceeded expectations and did fabulously -- we even received awards from a company that monitors corporate customer service.

Unfortunately, shortly before bonus time, an email went out explaining that the company hadn't really done as well financially as they'd hoped, therefore no one was actually getting any bonus at all.

In one move they negated an entire year's worth of motivation, and completely decimated their employee's faith in the company's word and loyalty.

Guest's picture
Scott

Great article. I've always said that money is a lousy motivator; once that first check is in the bank, it’s just expected. There is nothing more powerful than aligning company goals with people’s raw desire and ambition – of course there nothing more difficult either...

Guest's picture

My last job was lower pay, not as fun, but had more incentives (bonuses, stock options, etc) that no one ever actually got, ever. I left that place.

My current company pays better, is more fun to work at and is an environment more conducive to its employee's growth. It also have fewer incentives that we do actually achieve.

Needless to say, more and better quality work gets done at my new job.

Guest's picture
Dan

I wouldn't describe my situation as 'suffering' under an incentive plan. It's worked well at my company to give our employees a kick in their already intrinsically motivated pants.

To draw the conclusion that incentive plans *never* work seems like a very hard line to take. This post feels like a book report done after reading something full of wrong ideas that appeal to you. Perhaps the case being made has been reduced for this summary and lost something.

(I recognize that it's easy to armchair quarterback someone else' work; I genuinely feel that there is some critical thinking left to be done on this topic.)

Guest's picture
Guest

I agree with Dan. Assuming that incentives "never" work is the sight of a simple minded individual. No offense. Our company is small and the work available is cashiers and stockers positions. Our incentive plans work great. We have business in a rough neighborhood and our turn-over is high. Within the last six months however we've developed two incentive plans. They understand that the more money that comes to the business the more money comes to them. Which results in better management of inventory and sales. And for these employees that is the motivator. Money, Rewards and Vacation!

Philip Brewer's picture

My thinking on this topic dates back well before the Alfie Kohn book, to the early 1980s when I ran into a great article on "gaming" incentive plans.

The article presented long strings of attempts to come up with a metric that couldn't be gamed, always ending in failure. If the metric called for more production, the workers produced quantity over quality. If the metric only counted "good" units, the workers sped the line up enough to hit the metric (even if it meant producing even more bad units). If the metric put a ceiling on failed units, the workers slowed the line down enough to stay under the ceiling. And so on.

The article was compelling because, faced with workers finding a way around the metric, the reader automatically said, "Well, of course--but you could solve that by making the metric be X." Except that the article was always one or two steps ahead of you, coming up with that metric, and the reporting on how it was evaded by workers at some plant or office. It was really quite humbling to find that all your ideas had been tried and found wanting.

Sadly, I saw that article in some paper journal, and I don't remember enough about it to find it again.

Really, though, I base most of this on my own experience. I've just seen too many incentive plans over the years. I've seen some that were severely de-motivating, and I've seen others that were only a little de-motivating. I've seen some that paid out large bonuses (which are great to get), and I've seen others that paid no bonus at all. But I've never seen one that made employees more creative or more collaborative. I've never seen one that made employees try harder to produce good products or please the customer. All the plans I've seen either did nothing (except waste some time and generate some grumbling and ill-will) or else caused workers to spend time doing stuff that was something other than the most useful thing they could have been doing. (Because, after all, if it hadn't been for the incentive plan, that's what they would have been doing.)

Alfie Kohn's book was important in the evolution of my own thinking on this topic, though. The article I mention, and my own experience, offered some emperical evidence that incentive plans don't work. Kohn's work, though provides a basis for understanding why they don't work. With that understanding, it's not such a big jump to conclude that they never work (for any job that's not utterly trivial).

Guest's picture
Dan

How do you explain the incentive programs that have worked?

What happens when you add extrinsic motivation to a set of already intrinsically motivated employees? My best guess and anecdotal evidence suggests the intended effect (I was there, it really happened).

Perhaps the wisdom here is for hiring managers: don't bother with the extrinsically motivated worker.

Dueling anecdotes are unlikely to change minds, but I assure you I've been a part of incentive programs that succeeded.

Guest's picture
Alyson

I have three reasons why.

One, I have a friend who, a few weeks ago, posted on her Facebook status update: Got a super shweet bonus. Yesterday she posted: wonder how long it will take me to find a new job. Obviously, the bonus was not the be all and end all.

And you wrote about the kid and the skateboard. Now, take a kid with no interest in skateboarding and offer him (or her) money to learn the trick, make it an intermediate or advanced trick, if the kid really has zero interest in skateboarding, you could offer them $1000, $2000 or more and he/she will never ever earn it. Skateboarding is hard, you fall off, you get scraped up. If you want to learn, all that is part of the process, if you don't, you'll give up.

And, I"m getting my master's in education. It's pretty much what all the educational research says (despite ever more new policies to the contrary) - kids do best (and adults) when they are motivated by internal stimulus and curiosity and will retain that knowledge much longer. They want to learn, they are motivated to learn, they will learn. Otherwise, they just keep it long enough to get the 'A' or the award and out it goes. That's why Jay Leno can stop people on the street and make them look like idiots. They had no interest in the first twelve presidents of the US to begin with.

Philip Brewer's picture

...dueling anecdotes aren't likely to be helpful.

I guess I'd just ask what you mean when you say a plan "worked"?  Do you mean the employees did better work than they otherwise would have done?  More work?  The same work, but they got it done sooner?  All of those would be hard to measure--you don't have a control group of matched employees that didn't have an incentive plan.

It's easy to feel like an incentive plan was a success:  everybody worked really hard, they hit their deadline, and the product was a success.  But what if you look at things  a bit more broadly?  Did some of the key people who made that project a success take their bonus money and move on?  Was the next product harder to create, because developers trying to hit their metric took some shortcuts?  Did workers on some other project, who didn't meet their target (and didn't get a bonus) become so demotivated that they started spending their work hours updating their resumes?

Alfie Kohn's book looks at some of these issues--and does it with actual data, rather than just anecdotes.

Guest's picture
Edgar A.

Merit pay in education at every level is much favored by administrators and politicians. My observations are that instituting merit pay for college faculty leads, first, to competition to be on the committees that design or administer the evaluation policy.

Second, it leads to attempts to pump up the scores that contribute the most points. Teaching tends to be measured by student evaluations, so improving these is aimed for. If this were attempted through increased helpfulness to students, it would be a good thing; but usually, it's done by handing out higher grades.

If improved research is given high priority, quality of research would be hard to measure, but quantity can be tallied. So abstracts, presentations, and short articles increase, but not monographs or books.

What is most striking is how strong an incentive even a small pool of money to be divided turns out to be.

I would say that merit pay tends not to improve instruction, research, or service by faculty. It is, however, divisive. It may be that this is a successful outcome for some administrators.

Guest's picture
Matt

This reminds me of a quote attributed to Einstein.

"There are some things which can be counted that don't count. And there are some things which count that can't be counted."

Pretty much every manager would love to have a purely quantifiable system by which to measure productivity. Luckily for humans, such a system will never be possible.

Guest's picture
Misa

I wouldn't say that ALL incentive programs suck. We have one at my work, but it's a bit non-traditional, and I like it that way.

Basically, we get QAed twice every month. Those scores are averaged to give us a QA score for the month. Then, that score is computed with three other scores: how much time we spend on the phone (my work is, obviously, phone-based and we're given a specific amount of "extra" time every day to do things like put notes into the computer after a call or take an unscheduled break to go that bathroom or what have you), what our survey scores are (we ask clients to take an optional survey at the end of the call about the service we agents have provided... a significant portion of them do), and how many absences and tardies we have. Each month, based on that combined score, we're given a specific number of points. These points can be traded in for extra money, each point being worth a specific amount (taxable, sadly). But there are other things that this incentive program does as well... it can give you an extra day off, paid or not, planned or not, depending on the points you spend, a "casual day", wherein you can wear whatever you want rather than business casual, prioritizing you in the que to get off of work early (that time off is unpaid) or you can even be prioritized in the que for your choice of shift when we do our yearly shift reorganizing. I LOVE this program because it offers non-traditional incentives. I like the money and all, but I've only used that a couple of times (around Christmas, for example). What I like more is things like prioritizing getting off early (on days I would just like to go home), the yearly shift thing, and... well, there's a couple of incentives I haven't mentioned that I enjoy, too.

The important thing here is that the things we're given points for are things we're expected to do anyway. I'm expected to get a certain percentage on my QA or risk losing my job (after a certain number of bad QAs). I'm expect to be on the phone as much as possible. I'm expected to show up to work every day. I'm expected to do well on the surveys (those are averaged to account for anomalies).

But, for instance, by not using my "extra" time, I benefit (my overall score is higher, leading to more points) and so does the company (that's more time that I spent on the phone). I've known people who were not feeling their best, but not necessarily sick enough to really justify staying home, who have gone to work, saying "I don't want to lose out on the points". I have gotten off early SEVERAL times because of prioritizing, which actually saves the company money because the computer will only allow us to go home early if the call volume is low.

And a lot of these things don't cost the company any money (casual days, shift scheduling, and leaving work early) and some of them actually benefit the company (saving money spent on hourly wages by the company when call volume is low). But it DOES help with morale... I know one woman who takes an extra casual day every week (Fridays are casual already) and she's much happier because of it. While that doesn't appeal to me as much (I don't mind what I wear to work), I DO take advantage of getting off early sometimes and I'm saving up to get onto the shift I want.

So, some incentive plans are helpful. I think it just depends how they're done.

Philip Brewer's picture

Somewhere (I can't remember if it was in the book I mention or another), Alfie Kohn mentions being brought in as a consultant by a company that was working on their incentive plans and other policies.

The main thing they wanted, they said, was for employees to "feel empowered" and more in control of the work they did.

Alfie said, "Well, that's easy--put them in control of the work they do."

Of course, that didn't go over big with the corporate bosses who had brought him in.

I think companies would be way ahead of the game if they treated employees as professionals, giving them the tools they need to do good work, working with them to measure the success of different strategies, and then sharing the more successful strategies with the other employees.

Guest's picture
simple Paul

I agree that the incentive systems can always be gamed. That doesn't make them all bad. Some people don't really have a "passion" for their work; an extrinsic poke can help them.

My beef is with incentive plans that reward only the "top 10%" (or similar). Wouldn't it be wonderful if *everyone* met the goal? Then you run into the economic downturns (already mentioned here), or Unexpected Success -- where management expected to pay 2 or 3 bonuses, but instead things worked so well they're faced with paying 50. They *have* the 50x, but hey, that's a lot of money! Too much!

I had four relatives that offered me $1 for every "A" I got in grade school. I picked up a dollar here and there until I figured out how to study in 5th grade and started getting straight As. One relative paid off. Once. After that, no one could afford the $6 per semester.

Philip Brewer's picture

As I said right at the top:

I don't mean to say that incentive plans don't work.  They just never do what you want them to do.

If your jobs are absoutely trivial--stuffing envelopes, let's say--then you can get quantitative increases in performance without a meaningful drop in quality. 

My claim, though, is this:  Overall employee performance (in any job that requires even a tiny bit of thought, skill, or creativity) will always suffer if you have an incentive plan.  I think the data supports that--see the Alfie Kohn book, for a survey of the research.

Employes may understand that "the more money that comes to the business the more money comes to them"--but I think they may understand it better than you think.  More money to the business enriches primarily the business owners.  To get more money themselves, they no doubt understand, requires meeting whatever the arbitrary terms of the incentive plan are.  If the incentive plan is large, they will do so--regardless of whether it's the best use of their time.

Much better would be a combination of a profit-sharing scheme (which would mean that more money to the company really did mean more money to the employees) together with a scheme for workers to share best practices among themselves.  (That latter will only work if the employees actually want to do a good job.  In my experience, though, most employees do want to do a good job.  If they don't, then I suggest you look to your hiring and management practices and solve that problem.)