Incentive plans always go awry
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.
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?
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.)
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.