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Paying for Performance

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You Get What You Pay For: “I” vs. “We”

“There is no ‘I’ in team,” people often say to me.

“There is no ‘we,’ either,” I reply with a mischievous grin.

This wordplay points up a critical tension in working on a team, part of what one researcher called the “paradoxes of team membership.” He defined a paradox as “a constant struggle between apparently opposing values” (source #2 below). In The SuddenTeams™ Program, I list the first of these as “Being an individual versus being a team member”:

“Each team member has to express his or her strengths as an individual to create the skill mix the team needs, but at the same time you have to put the team’s needs first… A team member put it bluntly: ‘You have to be able to let go of your own ego. You have to relinquish ideas to the team—let the ideas be the team’s, not yours. This is tough.'”

It becomes tougher if you are not being paid to be a team member. Most companies talk about teamwork but pay people to be individual performers. One teamwork researcher has pointed out, “Talking about teamwork and cooperation and then not having a group-based component to the pay system… signals what the organization believes is actually important—individual behavior and performance” (#4). No company should be surprised that people follow their own agendas when the company pits employees against each other for raises. You get what you pay for.

Often people are really only paid to show up. If your organization pays a salary or hourly wage with annual raises and no bonuses, you’re really only paying for time, even if the adjustments are partially based on performance (see the next topic). Humans are far more motivated by immediate needs than long-term rewards, unless the rewards are so great they lead to self-motivation, like the goal of getting a college degree. The promise of an extra percent or two of pay many months from now is rarely going to have more power than more immediate psychological pressures.

If your company wants maximum productivity from your group, at some point it is going to have to reward the teamwork behaviors that maximize productivity. Notice I said reward the behaviors, not just the results. Tell somebody to improve some measure by 10% but don’t tell them how, and they probably won’t be able to do it. Reward the needed behaviors to get the behaviors, and assuming you’ve chosen the right ones, the results will follow. There are various ways for doing this, quoted below from the SuddenTeams section on group-based compensation with an example of each and citations where appropriate.

“Raises for new teaming skills or knowledge, and/or work skills learned as a result of the team’s efforts.” For example, one company “implemented a skill-based system for setting base pay. Workers could receive on-the-job training in 13 skill areas including technical and people skills… With each skill came a pay raise of a set amount” (#1).

“Bonuses for efforts—as opposed to results—tied to achievement of milestones.” A software company “paid out pre-announced bonus amounts to product development teams in two parts. Half was paid if and when the team hit the target deadline. The other half was paid only if quality targets also were met. Those targets were measured by customer satisfaction surveys, responses of pre-identified focus groups, and technical support calls as of 90 days after the release date” (#3).

“Bonuses for successful suggestions.” A company created a program where employees earned credits that could be used to buy goods from a catalog. The amounts were based on how much money was saved. An impact of $5,001–$10,000 earned a $150 credit, for example. The program created $16 million in savings in three months(#3).

“Gainsharing—If team activities result in measurable cost savings or revenue gains, (give) some of the extra money to the teams.” One company encouraged each team to create “a plan identifying measurable improvements it hoped to make in one of three areas: safety, financial results, or operational results. If the team was able to show bottom-line gains from the effort, it received a percentage of the dollar savings”(#3).

Of course, if you are a “worker bee” or team leader in a larger organization, there may be little you can do to change the pay system. If you have control over your team’s budget, you might be allowed to carve out a portion for team-based rewards. And anyone can suggest a change to upper managers. You may not want to personally, especially if you typically do well under the current system. Think, however, about the stresses of the typical salary review process. You don’t need a researcher to tell you, as one team of them wrote, that typical processes “absorb vast amounts of management time and resources, and they make everybody unhappy” (#4).

Carefully designed and implemented pay systems based on individual and team performance are more satisfying to people because folks know exactly why they got the pay they got and how to get more. These systems also take the burden off of managers trying to be fair despite having to use subjective measures, and reduce the company’s legal risks by limiting the impact of hidden biases all humans have. I believe such systems are a win-win-win approach, and the most powerful way to get a company what it actually wants: the kind of performance that increases profits.

Sources:

  1. Crandall, N.F., M. Wallace, and D. Bisgeier (1997), “Case Study: Work and Rewards Redesign at Smith & Nephew,” in Team Pay Case Studies: What’s Working in Companies Today. American Management Association: New York.
  2. Donnellon, A. (1996), Team Talk. Harvard Business School Press: Boston. The team member quote is from this source.
  3. Parker, G., J. McAdams, and D. Zielinski (2000), Rewarding Teams: Lessons from the Trenches. Jossey-Bass: San Francisco. Also the source of the next two examples.
  4. Pfeffer, J. (1998), The Human Equation: Building Profits by Putting People First. Harvard Business School Press: Boston.

Pay for Time and Time is What You Get

“You get what you pay for.” We often tell ourselves this when rationalizing the “need” to buy a BMW instead of a Hyundai, a Hugo Boss suit instead of one from JCPenney. Yet most companies seem content to pay people just for showing up.

In 1948, controversial psychologist B.F. Skinner published a utopian novel titled Walden Two, referring to American philosopher Henry David Thoreau’s book about living by Walden Pond in the 1840s. Skinner is a behaviorist, believing the right combination of incentives and punishments can mold anyone’s behavior as desired. More recent research into the effect genes have on our personalities disproves the basic premise, I believe, but many of his ideas are used successfully to help people function despite their inherent dysfunctions.

In a journal article, psychology Assistant Professor William Abernathy of Southeastern Louisiana Univ. looks at how some of the principles applied in the fictional world of Walden Two could be used to change behavior in business. The article caught my eye because I read the novel in a college philosophy class. In the article, the idea some managers have that people should do something “because that’s what they’re paid for” takes a big hit.

Abernathy writes, “wage and salary payments… are based on time on the job during the pay period rather than performance during the pay period.” He adds, “When you pay for time, you get time. When you pay for results, you get results.” Where people are not paid for results, the typical method of behavior control is what he calls “aversive control. People work to avoid criticism, suspension, or termination. They do not work for their wage or salary but rather to avoid losing it.” In this environment, “escape and avoidance behaviors (tardiness, absenteeism) are likely.” Aversive control also requires more supervisors, one for every 4 to 7 workers.

Straight wage-and-salary pay systems also make payroll a fixed cost that cannot vary with the times. In today’s economy, it forces layoffs that might have been avoidable if a greater percentage of pay was based on company performance. Some companies responded to the Great Recession by requesting big cuts in base pay from their employees in exchange for fewer layoffs. In every case I heard about, the employees agreed, making sacrifices so their colleagues could keep their jobs.

Abernathy says Skinner points to a better way, which is having employees directly feel the impact of external events rather than putting bureaucracy in the way. He quotes Skinner from the book: “You can’t foresee all future circumstances. You don’t know what will be required. Instead, you have to set up certain behavioral processes which will lead the individual to design his own ‘good conduct’ when the time comes.”

The best-known method for this is profit-sharing. But profit-sharing with no tie to personal performance encourages what economists call the “free rider effect,” as Abernathy says. He describes a method similar to the “work credits” system in Skinner’s novel, in which people are paid by the task—piece work on steroids. The article includes an example employee scorecard that:

  • Rates performance based on measurable goals,
  • Adjusts the worker’s base pay accordingly, and
  • Uses profit results to modify final pay.

For example, if you earned a 5% bonus by maxing out your individual performance, that 5% is all you would get if profits were flat. But it might get doubled to 10% if profits were strong. This would eliminate a concern I address in SuddenTeams about setting goals that could hurt other performance measures if achieved. A goal to cut costs is great unless the team reaches it by cutting quality.

In a sample scorecard for a salesperson that Abernathy presents from other researchers, there are four measures:

  • Gross revenue.
  • Gross profit margin, as a percentage.
  • “Milestone completion on a sales project,” as a percentage.
  • The “salesperson’s average customer satisfaction survey rating.”

These are weighted according to company priorities. To this example company, the milestones are most important. Those results equal 40% of the grade, so to speak, and the other three 20% each. For each rating, there is a minimum acceptable result equal to zero on the scale and a goal equal to 100. To prevent the salesperson from focusing only on the measures he or she wants to do, negative scores are possible (-10 and -20). In other words, failing to meet the minimum on one measure could cancel gains on others.

To ensure alignment of each employee’s scorecard with company goals, Abernathy writes, the ideal system would start with the executive team setting and weighting those goals. The president’s scorecard would be based on the goals. He or she would create scorecards with the other executives; they would do so with their direct reports; and so on to the line level. “This process ensures alignment since each ‘designer’ wants to ensure the direct reports’ measures and priorities drive success on his or her own matrix,” Abernathy explains.

Pay for time alone is not a motivator in part because it is expected. Abernathy points out that self-employed people don’t have a ceiling on pay, but also don’t have a floor. Hence their motivation comes from both directions. Pay-for-time employees, having a relatively secure floor, can more easily indulge in free riding. One solution is to take out a few floorboards. Abernathy reports, “Organizations have had success when base pay was allowed to fall to 85% of market with a 145% of market pay earnings opportunity.” This was implemented over a period of years by raising the possible bonus pay annually rather than raising base pay. Inflation would lower the floor.

Walden Two does not mention managers. In nature, a system too complex for hierarchical control is broken into subsystems. Abernathy quotes another researcher who points to the central nervous system. Some body reactions require so much speed that the brain is divorced from the process. When you touch a hot pan, the signal only goes as far as the spinal cord, which in turn signals your bicep to pull the hand back. Another example is behavior that becomes routine, transferred from the higher thought centers of the brain to simpler structures. You have to focus on your balance when you learn to ride a bike, but eventually it becomes second nature.

Along those lines, Abernathy writes, “In place of military-style bureaucracies, organizations should work toward self-managed employee teams that are in direct contact with financial contingencies.” If its income is directly impacted by the division’s or company’s bottom line, you won’t have to force help on a team, he says. They’ll ask for it.

Source: Abernathy, W. (09), “Walden Two Revisited: Optimizing Behavioral Systems,” Journal of Organizational Behavior Management 29:175.

Rewards for Goals Improve Performance for Free

A study sponsored by The International Society for Performance Improvement confirmed the value of teamwork-enhancing pay schemes: “tangible incentives in the form of money or awards increase performance an average of 22%.”

Professors analyzed the data from 45 studies, surveyed 145 U.S. organizations, and concluded, “There is solid evidence that paying people for exceeding work targets causes people to:

  • “Value work tasks more.
  • “Have more self-confidence and esteem for their employers.
  • “Be more persistent at work tasks.
  • “Strive for higher levels of accomplishment—and thus an even greater overall interest in work.”

The study, done in 2000, was brought to my attention by the Linked Stars Blog. It was not published in a peer-reviewed journal, and was funded by a foundation whose trustees are in the incentives industry. But it was conducted by academic researchers; the ISPI is associated with business schools and professional organizations; and the findings align with my research.

Incentive programs targeting individuals increased performance by 27% and those targeting teams by 45%. The reason the authors surmised for the team results contradicts one of the fears expressed about team-based incentives. Team members don’t want lazier individuals getting the same rewards as harder-working ones. “Although individuals can still loaf in (team) work, they normally do so only when not being assessed, monitored, or receiving feedback from their teams,” the study says. Team-based rewards motivate teammates to push the “social loafers” to better performance.

Incentives were more effective for helping people persist in known tasks or invest their “best ‘mental effort’” (at least a 26% performance increase) than improving performance on new tasks (15%). They worked equally well at raising output or quality, and were popular, with 72% of respondents expressing satisfaction.

But the system has to be done right. “Many organizations implement tangible incentive systems without studying the performance problems they are intended to solve, or the conditions that make incentive systems effective,” the study said. Thus, “implementation errors were committed, reducing the perceived effectiveness.” Throughout my career of promoting better systems of management, I have received resistance because people had “tried it” without success. In each case, managers had implemented the system in pieces and then blamed the method for problems that arose, instead of blaming their piecemeal approach. Pull a few crucial gears out of a Ferrari, and my little subcompact will putter right past it. The authors call insufficient training or coaching the likely suspects where incentives did not work well.

The study analyzed the data against four types of incentives from a different study:

  • “Quota—Incentives are provided for meeting or exceeding a performance goal.
  • “Piece-Rate—Incentives are provided for increasing units of performance such as producing more of something.
  • “Tournament—Where individuals and teams compete and the winner receives an incentive.
  • “Fixed-Rate—Where a fixed salary is paid for specified work.”

The other study found quota systems the most effective at improving performance, followed by piece-rate, with tournament or fixed-rate systems the least effective. Quota systems combine the well-proven strength of measurable goals for improving performance with giving more control to the individual or team over their fate. Piece-rate does the latter without the former, and the others lack or complicate these features by giving a lot of the control to other people.

Payments of money were twice as effective as gifts. People aren’t motivated by gifts they don’t care about. Longer-term programs were better than shorter ones. Incentives only work in situations where you can establish measurable goals (which I think you always can), the goals are challenging, other work is not allowed to suffer, and performance is currently low. Note that the study says “incentives could not motivate employees to perform better if they lacked the required knowledge and skills, or if they faced organizational or other environmental barriers.” These include insufficient people to accomplish the goal or policies that slow down work.

The study offers a “Performance Improvement by Incentives (PIBI) Model” to which I will add comments based on my research:

  • “Unrealized Work Goals”—If you measure performance and aren’t getting what you want, create SMART goals that are measurable, tangible, and challenging, but realistic given the training and resources you provide.
  • “Incentive System Selection/Design”—Create a quota system if possible, where the study says “the more that people exceed a pre-set level, the more incentive they receive,” and a piece-rate system if not. Use money as the reward in a program lasting a year or longer but with interim rewards. Let the people who will get the rewards create the system.
  • “Establish Task Value”—Try to design work such that tasks have value for workers beyond that of the incentives, by being interesting and using people’s strongest skills.
  • “Efficacy”—Ask individuals and teams if they feel they can accomplish the goals, and if not, provide the training, tools, or other resources they ask for.
  • “Agency”—Take a hard look at your organizational culture and structure to ensure you aren’t blocking success. “Supervision, accounting, bookkeeping, timeliness of disbursement of incentive rewards, accuracy and fairness in feedback and monitoring, training, and work reengineering (when necessary) are important factors in success,” the study says.
  • “Mood”—Proper incentives might improve employees’ moods, the study results suggest.
  • “Active Choice, Persistence, and Mental Effort”—Watch for improvements in the willingness of people to do something they resisted before, keep doing the new behavior, and be innovative in that effort.
  • “Performance Improvement”—Apply a cost-benefit analysis discipline to ensure the program creates more money than it pays out.

If the data from this study hasn’t convinced you to consider performance-based incentives, how about this final point? Done right, they cost you nothing but time. When tied to gains that improve your company’s bottom line, the money comes from money you would not have had without the incentives!

Sources:

  • Datta, H. (2012), “Economics of Employee Retention,” Linked Stars Blog, 10/18/12.
  • Stolovitch, H., R. Clark, and S. Condly (2002), “Incentives, Motivation and Workplace Performance: Research & Best Practices,” The International Society for Performance Improvement: Silver Spring, MD.

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