Incentive Programs (Still) Don’t Work
As we approach 2018, here’s a question worth considering: Why do so many organizations still employ management practices that have been discredited for decades?
If you ask me, one of the worst examples is the continued popularity of incentive programs, which attempt to prod employees into higher performance with bonuses, raises, and other material rewards. As Alfie Kohn writes in Harvard Business Review, “a growing collection of evidence supports an opposing view [that incentives do not drive performance]. According to numerous studies in laboratories, workplaces, classrooms, and other settings, rewards typically undermine the very processes they are intended to enhance.”
And Kohn wrote that in 1993.
Here we are, a quarter-century later, and incentive programs are still a fixture in corporate America. They hit an all-time high in 2014, when an estimated 82 percent of organizations offered employees some form of incentive pay. Since Kohn’s writing, a barrage of research and real-world examples have continued to reveal the ineffectiveness — and even harm — of incentivization. Why the heck are we still doing it?
“A complete scatterplot…”
When I saw Jim Collins speak at the Chief Executive Leadership Summit last week, he addressed this very topic during a Q&A session. His answer had me doing the wave in the audience all by myself.
“Incentive programs most often destroy companies and never create great companies,” Collins said. “You cannot turn the wrong people into the right people with money. You can’t.”
You could feel Collins’s passion as he spoke. He briefly recapped a key finding reported in Good to Great: When they did a full analysis of the role of compensation programs in companies that moved from good to great versus comparison companies, the result was a complete scatterplot. There was no correlation between compensation plans and outcomes, no matter how they sliced the data.
“You cannot turn the wrong people into the right people with money. You can’t.” —Jim Collins
Collins also brought up last year’s Wells Fargo disaster, in which employees created over 2 million fake customer accounts in order to game the bank’s incentive structure. As Collins put it, Wells Fargo is going to “spend a lot of years rebuilding their brand, because their incentives impacted behaviors in ways that were inconsistent with the brand promise [former CEO] Carl Reichardt put in place all those years ago.”
This is yet another danger of incentivization: behavior that inflates performance on paper only and that, in the worst case, may be unethical or illegal.
Money doesn’t build the skills companies most need today
The fact that these programs are still dominant is a testament to the glacial pace at which we are abandoning outdated management practices. Incentive programs do “work” in one sense: They can temporarily improve quantity and speed in a manufacturing environment. A century ago, linking a factory worker’s pay to how many units he could produce might not have been a bad idea.
But when we apply that paradigm to the creative/knowledge economy, the results are catastrophic. No incentive program has ever been shown to increase quality of performance, and no correlation with overall firm performance has been shown, despite study after study. Bribing employees for good work is completely at odds with what managers need most from today’s workforce — innovative thinking and creative problem solving.
As Kohn puts it, “the number one casualty of rewards is creativity.”
“But of course my employees care about money!” you might say. That’s true. You can certainly decrease motivation and performance by not paying your employees enough. People will leave if they feel they aren’t being paid fairly.
But the reverse is not true. You can’t increase motivation and performance by offering monetary incentives. Again, this has been demonstrated for decades — for example in the work of Edward Deci and Richard Ryan, who wrote in 1985 that “any contingent payment system tends to undermine intrinsic motivation.”
What to do instead of incentives
For a solution to this longstanding problem, I will again refer to Collins:
It’s all about having the right people who are committed to doing great things . . . the great people who have inside them that sort of neurotic sense that “I’ve got to do great things because it’s who I am.” You don’t want to lose those people, but you’re not going to turn them into those people with money.
In other words, the smart executive or manager proactively seeks out people who are committed to excellence, pays them fairly, and finds better ways to retain them than making them jump through hoops for a bonus.
If your organization currently uses incentive programs, you may balk at stripping them away. I encourage you to act boldly and do so. Here’s a brief overview of an approach I think is superior:
- Analyze market rates, and see to it that you’re paying competitive rates across the board.
- Consistently identify your A-players and find sustainable ways to keep them engaged — such as promotions, training, and access to growth opportunities.
- Constantly be on the lookout for superstar hires — the people with that neurotic commitment to doing great things. Find them and hire them, whether there’s a position or not, realizing that they already have the intrinsic motivation that no incentive program will ever be able to create.
As we gear up for a new year, I echo Jim Collins in encouraging you to take a critical look at what incentives might be doing in your company. As he said last week, “If you have incentives, remember that the economists were right. Always ask, ‘What are the unintended consequences?’”
