About a year ago, my employer adjusted the way I am paid. The changes were minor, but I still haven’t forgiven them. There were two aspects of the plan the irked me: the fact that my pay was reduced by 1% and the fact that it would be given back if I reached certain volume-based targets. I didn’t feel that reducing my pay by 1% was enough to affect the company’s profitability, so why do it? It was like a slap in the face. Worse, when the volume-based targets were implemented, I thought I would easily reach them… until the market crashed. I don’t miss the 1%, but I do resent the company for taking it away from me.
I believe this is referred to as a financial incentive and is considered good management. Managers in market-based economies tend to believe that they can improve performance through tweaking financial incentives. Economists generally posit that any outcome can be determined if the incentives are right. My experience, however, contradicts the academic viewpoint.
The first clue to what is wrong with financial incentives came to me from Alfie Kohn’s book Unconditional Parenting. The author writes about the destructive aspects of rewards and punishments. When you step back from the situation and look at the entire idea, it becomes clear that rewards and punishments are, by design, manipulative. Financial incentives are like a reward and punishment rolled into one, in that money will be given or withheld. Money is used an an incentive to motivate or manipulate employees. This sends two messages. The idea that employees should be manipulated into working toward the goals of management shows that management isn’t willing to convince employees that corporate goals are worthwhile and doesn’t value the personal priorities of the employees. Worse, offering more money for better performance implies that employees are withholding their best effort, holding out for better pay.
Implementing financial incentives in a corporation is an attempt to manipulate employees into compliance. There are, however, side effects. Alfie Kohn cites research showing that people who are rewarded for certain behaviours find less enjoyment in the behaviour. The thought process is probably something like, “this job must be really distasteful if they have to pay me extra to complete it.” Maybe we don’t expect workers to enjoy their jobs; after all, we have to pay them to do it. But Steven Levitt, the economist author of Freakonomics, points out an unintended consequence using the example of high-stakes exams. In summary, higher student scores translate into higher pay and better job security for teachers. Using some original data mining, he shows that certain teachers cheat or help students cheat on the exams. After all, cheating is a much more controllable method for determining the outcome than hoping that facts can be recalled by uncaring students in a high-pressure situation.
Incentives don’t always fail. Dan Pink, author of Drive, points out that financial incentives can work with mechanical tasks. When the outcome is entirely controllable and requires focus, incentives have the most benefit. On the other hand, narrowed focus inhibits creative problem solving. Financial incentives actually cause worse performance in the case where solutions lie on the periphery. As an aside, a very entertaining animation of a 10 minute summary of his ideas is available on YouTube.
In my work, I can choose between two compensation schemes, either based on sales volume or based on investment account values. I’m not talented at sales, so I’ve chosen the second option (which I also believe is friendlier to clients). However, as we’ve seen over the last two years, investment values are unpredictable. Because the desired outcome (higher investment values) is uncontrollable, I find the financial incentives to be distracting. I try to ignore it, since my actions have little effect on my income. If I were only offered a (reasonable) salary, I would still do my best work for my clients. The difference is that there would be no incentive to cheat (not that I’m tempted) as it turns out Madoff did.
What carrots and sticks have been implemented by your employer? Do they work? What would have to happen for you to perform at a higher level at work?