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Incentives as a Guided Misadventure

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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

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“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.

Contrived System of Reward

“But the worst part of my little bonus system,” Reggie confided, “was not that my managers manipulated the numbers, but that the system I created changed the mindset. I corrupted their thinking. Digging out of that hole is going to take time. And some of them will not survive. I created a contrived system to reward something I thought was good.

“And the winner of my little contest, the successful candidate who gets the position as the new division VP, is going to think he got the job by gaming the system. It doesn’t matter how I explain it, in his heart, his experience will tell him that he got the job by playing with the numbers.

“It is really true,” Reggie continued, “the behavior you reinforce, is the behavior you get. I created the incentive. I got the behavior.”

“If you are going to create a different environment, what has to change first?” I asked.

“All crumbs lead to the top,” Reggie said. “I have to change first.”

Competition and Manipulation

“So, you’re the culprit,” I repeated. “What specifically did you do that was so counterproductive?”

“I remember, it wasn’t anything extreme. We have different sales channels and different product lines, with outside sales, inside sales, internet sales. I began to hand out bonuses for each department with the highest gross margin, another for the highest revenue in the quarter.

“It’s funny, now that I think about it, when I handed out those bonuses, the room was quiet. There was no jubilation or high-fives, just a nod and a polite thank you.”

“Tell me about the down-side?” I asked.

“I found out later,” Reggie explained, “that each department gamed the gross margins. They would pump up the pricing in the last week of the quarter and then rebate it back to the customer in the next quarter. In the end, we still got our standard margin, but each department manipulated the bonus system. And all the progress we made on cross-selling was lost.

“And it’s not so much that they had to pay the piper in the next quarter, but look at all the wasted energy, counterproductive to what we stand for. And the last thing on our mind was doing a good job for the customer.”