Employee Motivation and Incentives

Over my varied employment history, I’ve picked up some lessons on how companies can get the best work out of their employees. Unfortunately, most of the lessons I learned were by counter-example — what not to do.

Teams where the best way to get ahead was to throw your colleagues under the bus.

Micromanaging bosses.

Companies with bonuses for behaviour that became toxic in large doses.

Even places where there was very little attempt at all to incentivise the right behaviour, just a general hope that employees would work hard!

Obviously, all of these led to some terrible outcomes:

  • High employee turnover
  • Unpleasant workplace culture
  • Far lower productivity
  • Stressed managers (who had to spend their days pushing employees to perform)
  • Animosity between executives and employees
  • Lower creativity

And the list goes on.

Stressed employees often overload on laptop decals, true story.

Here’s my argument (one that very much betrays my origins as a microeconomist — damned if I’ll apologise!): if you get the incentives right, everything else will follow.

Employees will work hard.

The company will achieve fantastic results.

Everyone will enjoy being part of the team.

And this is neither magic, nor Utopian thinking; you can see it playing out in the real world today.

For example, think about Uber. The company has come under fire in the past for its surge pricing, but it certainly works well in aligning incentives to achieve the desired outcome: get people in taxis when they need one.

When it is busy, drivers will be paid more, encouraging more of them to hit the road. And for passengers, it will cost more to travel, meaning that if your trip isn’t so important, or could wait for an hour or two, you might decide not to travel, thus freeing up taxis for those whose needs are more urgent.

Incentives work — if they are designed effectively.

Managers shouldn’t have to monitor day-to-day input/output; their hardest and most important task should be to set expectations at the start of the period and then assess at the end of the period. Then they can focus on the joy of being problem solvers, cheerleaders, and force multipliers.

The company should get out of the way and let employees work, confident that the system will ensure good outcomes.

“In the right kind of business, someone who really devoted himself to work could generate ten or even a hundred times as much wealth as an average employee… a company that could pay all its employees so straightforwardly would be enormously successful.” — Paul Graham

Enough talk — if you’re still around, I assume you’re convinced. How do we achieve this wonderful world?

How to structure good incentives

Here’s the formula: set targets that are challenging but achievable, and that align the employee’s incentives with those of the team and company. This is difficult, but also the key to running a great business.

It is important to have targets for individual performance and collaboration, to ensure that both churning out good work and assisting teammates are valued. For example, a salesperson’s bonus should obviously depend on the number of deals she closes, but she should also be rewarded for sharing her knowledge and skills with teammates — that way her interests and the company’s are fully aligned. After all, the company wants to optimise total sales, not just sales from one individual employee.

A vital caveat here: whatever the primary metric is, you should also set a target for an opposed metric to help guard against gaming the system or Pyrrhic victories. The former CEO of Intel said it best:

“For every goal you put in front of someone, you should also put in place a counter-goal to restrict gaming of the first goal.” — Andy Grove

An example might be helpful. Say you want a software engineer to ship as many new features as possible. Trouble is, the best way for her to maximise this is to write quick, sloppy code. So the counter goal to track (and tie to her reward) could be: bugs identified in features she has written.

To help kickstart your thoughts on what incentives you might set, below are some examples.

Incentive examples

Role: Product Manager
Targets:

  • Increase conversion rate of checkout page (primary individual achievement goal)
  • Maintain proportion of users who make it to the checkout (opposed metric)
  • Write documentation for key processes X, Y and Z (primary collaboration goal)
  • Documentation does not require more than 3 hours of review or revision from management (opposed metric)

Role: Performance Marketing Manager
Targets:

  • Grow traffic by 50% in Q3 compared with the same period last year (primary individual achievement goal)
  • Keep ROAS above 110% (opposed metric)
  • Run a half-day workshop on Adwords best practices (primary collaboration goal)
  • At least 12 team members attend workshops, and the average satisfaction rating from participants is greater than 7/10 (opposed metric)

Role: Accountant
Targets:

  • 97% of invoices are processed and paid on time (primary individual achievement goal)
  • Less than 2% of invoices are disputed by a supplier or customer (opposed metric)
  • Write a FAQ document covering at least 7 questions (primary collaboration goal)
  • Number of ad-hoc questions to which the department needs to write custom answers decreases (opposed metric)

So here’s my recommendation (and challenge) to you as a manager, entrepreneur, or small business owner: spend some time today considering how you can better set the incentives for your employees. I promise you that the time you invest will pay off many times over!

Former central bank economist, current product manager. Hobbies: thinking about and creating interesting stuff.