Coin-operated or Co-determined?
I’ve worked on compensation systems for over 20+ years in my career. One thing that continues to surprise me is how little change has occurred in mainstream cash incentive perspectives despite our deepening knowledge in behavioral economics and evolving workforce practices. Often comp pros will continue to preach that STIPs (short-term incentive plans) are most effective when the activity being incented is closest to the control of the person. But, I think it’s time to really question this. Of course, we’ve all read the stories of Wells Fargo where cash incentives went too far and encouraged fraud. My truth is that I’ve seen individual cash incentive plans go wrong more than they go right. Well, most are somewhere in the middle. Companies continue to use individual incentives to help drive revenue, especially with sales and marketing, but are these investments truly the most productive and powerful? Do they really drive enough revenue to pay for themselves or are they a diminishing return and a strain on the profit margin?
Most of us know the Dan Pink talk on motivation. Give it a watch if you haven’t seen the great RSA summary. This summary focuses on individual impact and leaves out the corporate community perspective. In most companies, the idea of one individual operating in his or her own silo is simply outdated. Company talent and wisdom must be more integrated now more than ever to drive a company forward. So, why do we continue to focus on individual incentives? The harsh reality is that it may help corporations manage remuneration budgets more tightly than the traditional merit pay with a salary compounding effect. As much as we all like those quick cash infusions, it is less predictable than a raise in a good ol’ wage.
So, what might our perfect world be for pay? First, a fair wage for the work is the only starting point. Adequate benefits, pension, and paid time away are second. Once a company has covered the foundation we begin to merge into incentives. I was fortunate to hear a research report earlier this year. My quick take away – we need to think differently – are we trying to drive individual performance or corporate performance? Yes, I know, both, but does it work? While there is documentation that individual incentives drive individual results, they also risk driving down group motivation and coordination. They can drive focus, but they can also drive down time spent helping and contributing. In this particular study, individual incentives had no overall productivity gains for the corporation. However, group incentives had a 0.7% productivity gain. Further, when a mix of group and individual incentives were paid there was a dilutive effect. There is some risk, as we know, with group incentives because there is lower individual control of the outcomes. This is the point that compensation pros focus on and it is a fair point. However, in this particular study, this control risk did not outweigh the overall outcome for the power of cooperation. The next logical thought is to blend them, but in this particular study, there were no additive productivity increases beyond those the group incentive already provided. In other words, the individual incentives were not adding to corporate performance but were dilutive to the profit margin. Certainly, a small study and more research in private companies is needed, but it is another piece of evidence that we are outgrowing our old incentive methods.
You might say 0.7%, that’s it? There is also the bonus effect myth. First, it typically drives the wrong effect and the halo of feeling of reward doesn’t last long. Some studies cite this reward effect to last as long as three months. That’s it. But, the more important piece of this for the compensation pro and executive team wanting to incentive performance is to add this idea of control and risk to your incentive evaluation matrix. Stop focusing on the individual control to reward connection. Focus on the team integration to corporate value creation.
I came from a more traditional corporation. It was a great one for the practice of fundamentals in a larger, intense, and fast pace environment. Individual incentives abound. It was the way things worked, we pay you $X,XXX and you perform $XXX,XXX. Executive incentives were high because they are the drivers of corporate performance. Right? But, in reality, we know that there is more to value creation than the top-executives. Now, I don’t want to undermine the criticality of a great leader – it is absolutely essential. But, when it comes to pay, it is not the singular answer. Most great leaders are great not because of what she or he does in a singular capacity, but because of what they enable the organization to do together.
When I arrived at New Belgium Brewing, it was under 200 employees, had a minority ESOP, a broadly shared phantom stock plan, and all-staff annual gainsharing scheme. No individual incentives. At first, I thought they were crazy. After all, I had the big company proof. But, did I? In our heydays, we were far more successful than most public companies can dream of. For the vast majority of years, corporate performance and growth were in the double digits (the good double digits). The New Belgium success story is the story of we. Turns out, this little company that could isn’t a statistical anomaly when it comes to the impact of group incentives.
Much later on, I did an internal motivation study with our sales team to find out what was most motivating to people. Number 1 was simply the ability to call themselves an employee-owner. They were a part of a trust that collectively owned the company. Individual incentives were clear down the list. These were not the tired coin-operated salespeople of yore. They were the contemporary, powerful, intrinsically motivated people of now who were dedicated to making an integrated impact for themselves and for every employee as part of the talent-value-chain. They knew that great beer didn’t brew itself, but the great beer was a result of great people working together.
If you think incentives are the key to everything or your magic pill – it’s not. There’s much more to a strong corporate ecosystem. Leaders need to consider design thinking to create social conditions that will empower great work. But, a big part of a successful culture starts with hiring. If you are hiring for skillset only and not for mindset (see also – Don’t Hire for Culture Fit), you may have embedded coin-operated thinking unintentionally into your company. Motivation fit should be part of your recruiting assessment plan. Certainly, we all work for money, but that should be a secondary motivator to solidarity based power and co-determination.
The lesson – be wary, very wary of individual incentives. I’m not saying they won’t work and in the short-termist, grow-and-sell company they most certainly work. But, in the long-term, sustainable, integrated impact company the jump ball should likely go to incentivizing all. But the win will go to building a great culture.
*Cartoon credit: Dilbert, Scott Adams