Tag Archives: incentive compensation

What is Work?

“Max, I know how you feel about your team’s attitude toward work. You believe they only show up for the paycheck. You believe, as a manager, you have to incentivise them above their normal pay, with a bonus or spiff to get them to pay attention, or otherwise engage in discretionary effort. Your belief is in line with many employee studies that say most are NOT engaged with their work. So, let’s not talk about your team. Let’s talk about you.”

“Alright, I’m game. But, understand that I am here for the money, too,” Max clarified.

“Yes, you are right, we do have to pay competitive. More importantly, we have to get money off the table. As long as people focus on money, or, because of their circumstance, have to focus on money, employee engagement will be fleeting, at best.”

“Okay, but understand that I am still here for the money.”

“Are you really? I could show you a number of ways that you could make a great deal more money than you are making right, now,” I teased.

“I am all ears,” Max replied.

“If you were willing to sell marijuana, which is now legal in some states, you would make more money than you are currently making.” I stopped to gauge his reaction to this unusual suggestion.

“Yeah, but.”

“But, what?” I interrupted. “You see, it’s not all about the money. People, even you, want work where you can make a contribution to something larger than you. You want work where you can bring your full capability, spread your wings AND receive fair compensation for that work. You want work where your contribution is recognized as important, work that does NOT need a carrot-or-stick for you to get on with that work.”

Max was quiet. He was thinking.

“Max, you are the manager of your team. You get to design that team, select that team and create the environment that team works in. As the manager, you DECIDE the culture of that team. What will be your foundation? Will it be built around spiffs, or accomplishment? I have never known a person to be more competent in their role because they were paid a bonus.”

Why Would They Skip a Step?

“What do you mean, I see things that my team cannot see? If they would just look, they would see it, too,” Max pushed back.

“Max, you are a manager. You are responsible for creating all the systems that people follow. You know more about how things work and how things go wrong. Give me a short list of things you see, that your team doesn’t see,” I asked.

“Short list?

  • Sometimes, we get parts in from our vendor that have a slight defect. If we use that part in our assembly, when we get to the end, the unit will fail a pressure test.
  • If we skip the pressure test, the units get boxed and sent to customers, who install defective units. Their first call is to the salesperson, who gets an earful from the customer.
  • If the salesperson gets three customer phone calls complaining about defective units, the salesperson loses confidence in our ability to make a quality product. He stops selling.

Should I go on?” Max quizzed.

“Why can’t your production people see that?” I prompted.

“I guess they can’t put the dots together. From the time we get that first defective part, to the time the customer complains could be three months time. And when the customer complains, we still have to track down the problem, then reference our production codes to find out when the units were actually produced. It might take another week just to track down the problem. There is too much disconnection for my production team to follow. They just know they get yelled at for skipping a parts-inspection and a pressure test.”

“And, why would they skip a parts-inspection?” I wanted to know.

“Funny, the team was actually proud of their assembled output that week. We were in a bind for a large order. It meant overtime and a team bonus for 50 extra production units that week,” Max lamented.

“So, let me understand. You design all the systems out here, including the bonus system for exceeding production quotas in a shorter period of time? And you wonder why the team skips steps, to get their bonus?”

Incentives as a Guided Misadventure

Reggie looked at me sideways. “Do you mean that this whole complicated issue regarding incentive compensation, that we hired expensive consultants to help us with, may be a guided misadventure?”

“You tell me,” I replied. “What type of environment do you create when you tell people that you are holding back part of their compensation because you don’t trust them to do their best?”

“You just said it, it creates an environment of distrust,” Reggie declared.

“And what kind of behavior does this distrust create?”

“Whooo! It’s all over the board. Some people work really hard, appear very dedicated and some people try to figure out how to manipulate the system to their advantage. I don’t know. Come to think of it, the people who seem committed, who perform the best, are the kind of people who would work very diligently even without the bonus.”

“And would you describe those people as stupid for working so hard without having a bonus as a carrot?”

Reggie shook his head. “No. I would have to say that is just who those people are. The words are -dependable-integrity-earnest.”

“So, what do you think this incentive plan is accomplishing?”

Bonuses in Most Companies

“How else are you supposed to motivate people?” Reggie asked. “I look around at what other companies do and bonus systems are used almost everywhere.”

“Why do you think bonuses are used in most companies as a motivation tool?” I asked.

“Well, I just don’t know of any other way to get people to go the extra mile, to give their best effort,” Reggie defended.

“I think you have your answer.”

Reggie looked puzzled.

“That’s your answer,” I continued. “Most companies use bonus systems, because they don’t know any other ways to properly motivate their teams.”

Reward or Punishment?

“So, you clearly understand that you are the problem?” I asked. Events became clear for Reggie. His incentive program backfired. In the short run, his company’s margins were not compromised, but long term, he created a culture cloaked in clandestine competition. His managers gamed the system to beat margin quotas.

“We hired a compensation consultant to help us structure this incentive program,” Reggie defended. “They were very professional and seemed expert in their process.”

“Tell me, Reggie, what impact did this incentive compensation have on your manager’s contract?”

Reggie moved his head an inch, “What do you mean, what contract?”

“You know, the contract. The contract that says You get paid every day to come to work and do your best. To focus your efforts where they are most effective. To give us your best effort.

Reggie didn’t know how to respond. “Yeah, but that doesn’t seem to work around here. People don’t come to work and do their best unless you, you, you hold some of the money back and give it to them as a bonus.”

“So, what you are saying is that you don’t trust them to do their best, so you don’t give them all their money unless they show their best effort? Then you give them their, well, you call it a bonus.”

Reggie slowly nodded his head.