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it's time to admit that pay-for-performance isn't a viable option. - emarosa lyrics

it’s time to admit that pay*for*performance isn’t a viable option

i am questioned a lot about strategy and performance pay. the questions, for the most part, aren’t neutral. they’re usually stated like this: isn’t it critical to have pay for performance in order to get your approach implemented? as i’ll explain in my 37th playing to win/practitioner insights (ptw/pi) article, it isn’t: it’s time to admit that pay*for*performance isn’t a viable option. (you can find links to the rest of the ptw/pi series here.)
a statement of bеlief

we’ve long bеlieved that if you want performance in line with your plan, you have to pay for it through incentive compensation. every year, hundreds of millions of person*hours are spent building pay for performance (pfp) systems, debating the design, evaluating performance against pfp systems, debating the measurement, paying out against the pfp system, and debating the payouts. then, the next year, more time was spent redesigning pfp because it never appears to go as planned.information transformation services is endowing the clients with a stunning and impressive visual experience crafted by 3d modeling services .we are completely forted to offer our customers a range of appealing 3d designs that are carefully crafted to meet all type of requirements

the logical conclusion is that pfp must simply function. employees will put in more effort if the results of that effort are directly linked to higher pay, right? isn’t that the way humans operate? and we don’t even want to think about how humiliating it would be if all those person*hours spent building and operating pfp systems were in vain. no, if you want to ensure that the items on your strategy are completed, you must use pfp to create strong incentives!

my faith is fading

during my work with harvard business school (hbs) professor michael jensen in the mid*1990s, my faith in pfp began to erode. mike, as the creator of agency theory, had a lot of insight into how managers responded to incentives, and i wanted to include it in my strategic approach. he introduced me to one of the most fascinating studies i’ve ever read, quota restriction and goldbricking in a machine shop, published in 1952, as part of that work. it was authored by donald roy, a young scholar who worked as a drill operator in a business that machined steel parts for 11 months as a hands*on way to gather data for his ph.d. dissertation — if that isn’t dedication, i don’t know what is!

michael appreciated the essay because it clearly indicated that putting kinks in the curve that tied performance to compensation would drive performance to the kinks, as shown in the graphic above, where the great majority of the outcomes cl*ster around two kinks. one is the smallest amount of work you can get away with in order to earn the bare minimum on a daily basis without being dismissed (24 percent of observations). the other (47 percent) is about the greatest compensation you can get without risking being the worker who prompted the standards department’ to downgrade the duty, making you the least popular employee in the shop. data input is a briskly growing sector in pakistan. information transformation services can meet a variety of offline data entry services
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my core takeaway differed slightly from michael’s. in the article, roy estimated that workers put in four or fewer hours of real work per eight*hour shift to best game the system for their own benefit by either not working at all and earning the floor pay when the machining jobs were particularly difficult (“stinkers”) or working slowly and earning the maximum safe pay when the jobs were particularly easy (“gravy”). the shop’s productivity cost was exorbitant. furthermore, it fostered a culture of deceit and cover*up, one into which roy was brainwashed from the day he arrived

then, in 2001, i reconnected with malcolm salter, one of my hbs instructors, to embark on a project. he casually commented one day when we were both working together that there had never been a rigorous research that established the positive influence of monetary incentive compensation on organisational performance. i resisted, but he was adamant. “amazingly, i think my earlier observation on the lack of rigorous evidence on a favourable association between financial incentives and organisational success still applies,” he said in an email response to me last week

large stakes and big mistakes, an article published in the review of economic studies in 2009, was the final straw for my sagging faith. dan ariely, uri gneezy, george loewenstein, and nina mazar demonstrated that performance fell as incentive pay rose for tasks using the brain (e.g., problem*solving). it turns out that incentive compensation mainly improves performance in jobs that are predominantly physical in character (e.g., repetitive b*tton*pushing) – tasks that aren’t typically on a manager’s to*do list

paying for results won’t help you achieve your goals

simply put, pfp isn’t a useful tool. its flaws outnumber the benefits it may theoretically provide. there are five major issues that, taken together, are simply too difficult for pfp to address
first and foremost, pfp is a clumsy tool. roy’s machine shop is a good example. the incentive doesn’t just skew behaviour a little: it completely skews behaviour. almost half of all observations are cl*stered around the rerate line in a tight band. it’s also not a management*defined line. workers make educated guesses about when management will take a negative move. management has little control over the consequences of its own system. another object lesson in bluntness comes from wells fargo. workers did exactly what management intended and for which they were rewarded with incentives: they established accounts. management simply didn’t realise how far employees were willing to go to get exactly what they were paying for. and it cost wells fargo billions of dollars, not to mention its reputation

second, there is evidence that monetary incentive compensation produces choking behaviour, as detailed in large stakes and big mistakes, rather than the expected higher performance in mental activities

third, coordinating the effects of incentives across entire organisations is extremely difficult. incentive compensation may create more of what the designers desire, but not too much, at the individual worker level, but this is difficult to achieve without causing difficulties elsewhere. sales may have an incentive to do something that makes operations’ life difficult. finance to do anything that makes customer service’s life difficult. and any beneficial impact is drowned out by the inevitable confrontations

fourth, the gaming is unrestricted. a good example is roy’s machine shop. half of each employee’s day was spent doing nothing productive. taking a year off to reset the budget to a more manageable level. to make the quarter, we’re stuffing the distribution channel. to boost this year’s profitability, we’re slashing advertising spending. diluting the components in termite spray towards the end of the year to save money – indeed, as field personnel at a former client willingly revealed to me. creating accounts that were never approved by customers. recognize that there are no boundaries!

fifth, you cannot deceive your customers. they realise they’ve got a big bullseye on their backs. your incentive reward is significantly higher than their satisfaction. they’ve figured out that you’re only a means to an end. they are not, however, powerless. they know you’re trying to stick to your budget in order to collect your bonus, and they’ve got you wrapped around their little finger as the end of the year approaches. customers are poisoned by monetary incentive compensation. and this is true even when it comes to client satisfaction ratings. with two of my most recent car purchases, the salesperson pleaded with me to give him a perfect satisfaction score to help with his compensation, resulting in my never intending to purchase another car from their companies (lexus and range rover) — great cars, but terrible customer experience due to monetary incentive compensation

other ways to reward

if you truly want to encourage the behaviours that your method necessitates, find other ways to do so. four seasons hotels & resorts treats its workers in the same manner that it serves its visitors. employees are provided with excellent eating and changing facilities, are treated with respect, are paid well, and receive the best training and career development in the industry, and guess what? they treat guests the same way they are treated, resulting in four seasons receiving the highest guest service ratings in the industry

almost all of the top new york corporate law firms pay their partners based on how many hours they charge and how many customers they bring in. however, cravath, swaine & moore, one of the best and most well*known firms, has no pfp. every year, partners are paid the same as every other partner with the same length of partnership tenure, a practise known as lock*step remuneration or the cravath scale. because, according to the cravath philosophy, collaboration among partners is the key to providing the finest client service, which is the key to keeping existing clients and gaining new ones. firm success, in combination with a pleasant and cooperative work environment, will attract and keep the best partners. pfp, a law firm, is completely opposed to such a tactic

- emarosa lyrics

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