Published in the San Diego Union-Tribune, May 7, 2018
This concept seems ubiquitous and an accepted and logical way to motivate an employee, to spur improved performance, to provide the carrot for the rabbit to chase. In other words, if you rock your project, the company will reward you.
Two weeks ago, I take one of my clients to lunch and the subject is exactly this. He wants to give bonuses, he wants to share the wealth, the company is hitting on all six cylinders (I know a Ferrari has 12, but let’s stay on this earth), and his puzzle is a simple one — how to allocate the wealth.
My pal has 11 employees, and he has a system that has worked up until now. Each year, he gives a percentage of the company’s profit to each employee, equally, because it is a team effort; they are a team, and he wants them to think like a team. Usually every member of the winning team (World Series, Super Bowl) gets an equal share — but Tom Brady gets a higher salary for unique individual performance. My pal has created an additional bonus pool that is to be allocated based on individual effort at the CEO’s sole discretion. My man is willing to (potentially) make less money personally so that his team can have greater financial reward. But the truth of course is that if the pie gets bigger — well, you know that game.
So let’s explore employee incentives and awards, most of which come with some modest financial consideration. And so we turn to a Harvard Business School research paper titled “The Dirty Laundry of Employee Award Programs.” You guessed it — it turns out that time sheets and clean sheets do not mix.
The study was done in five industrial laundries. What they found in the laundry that had the incentive program was that the “attendance statistics improved and the average level of tardiness decreased — but the amount of productivity also decreased, particularly among the very best employees who already had high attendance.” So, please explain.
First, it turns out that the laundry workers figured out how to game the system so they would appear to have excellent attendance — but only when the bonus round was in effect. Afterward, they went back to their normal routine. This tells us something about incentives. Once started, how long do you have to keep them?
If an employee was disqualified early — meaning there was no way he could win — then they gave up and went back to being tardy as before. Remember that if certain people are not there all the time, the laundry as a whole does not do well. That explains the decrease in productivity. The fantasy is that the bonus round will change long-term behavior, but it doesn’t. The behavior only changed when the award was within grasp. After that, sayonara.
Further, the stellar employees suffered in both productivity and attitude because they felt, “hey, I have been showing up on time for years, what’s with this new bonus round trying to reward employees with previous lousy attendance?” It actually de-motivated the best employees.
The study does cop a plea at the end arguing that some award/incentive programs do work well. In the laundry case, they were rewarding bad behavior that might improve, whereas the more rational approach is to reward the already stellar employees. It also suggests that public recognition on a wall in the dining area or in the newsletter is the most effective. “When employees bask in the glow of corporate praise, they will work even harder.”
Venture capitalists often spend a majority of their time focused on the companies in their portfolio that are not doing well, instead of the correct approach, which is to do the exact opposite — focus on the very best ones and make them even better. The rational man rule says sell your losers and let your winners run. But as you well know, most of us do the exact opposite because we “hope” the losers will come back.
Finally, when the primary motivation is the money involved in the reward, you can bet the best minds will figure out a way to beat the system. For further study, please refer to all compensation packages from the large brokerages, banks and investment banks from 1929 through yesterday.
Rule No. 559: “Show me the money,” Jerry Maguire