Incentives – Definitions and Actions – A Primer AGAIN!

Paul,
What if the outcome you’re looking for isn’t vague or not process specific. For example, creating a new product or service.
Let’s look at the iPhone – there’s not carved-in-stone process for creating an iPhone before one ever existed. Your goal is to create an innovative phone/pocket computer product that works the way other Apple products do.
Who’s to say there are specific behaviors that have to dictate how one achieves that result? Isn’t that just micromanaging via incentive programs?
(I’m genuinely curious – your knowledge in this area blows my mind.)
- Chris

You hit on a very important point (one made to the delight of the twitterverse based on the number of tweets) that Dan Pink brought up in his TED presentation.
When focused on the “unknown” or new innovation, and a team environment – incentives do more harm than good. The best way to handle the goal you described is to NOT do incentives – but create a mission. Some even suggest create a mission with very strict constraints that eliminate the teams’ (or the individual’s) ability to rely on historical processes and thinking.
I’m referring to those incentives that focus on specific business goals such as sales, calls, margin, CSI scores.
Thanks for bringing up the one area where any incentive – no matter how well designed would be a bad idea.

Paul — There’s a great quote I saw somewhere that says, “To try to do something which is inherently impossible is always a corrupting enterprise.” I think that’s something incentive designers need to keep in mind: is what you’re wanting your people to do “possible”, in the sense that regular people, using legal, moral means can do “X”, whatever “X” is?
That was one of the contributing factors to the ’09 financial meltdown: conflicting and impossible goals (X percentage of home ownership, made up partly of people who couldn’t afford it). Add to that the incentives to make/approve loans and you come up with 50 year mortgages, interest-only mortgages, no down-payments, etc.
A genuine formula for disaster, then you add in the products designed strictly to spread the risk, and BANG, you have a crisis from trying to do the inherently impossible — and using corrupt methods to do it (because honest methods couldn’t). Add government mandates to the mix, and the recipe for bad incentives is almost too enticing not to try.

I strongly suggest everyone pick up a copy of Jeffrey Pfeffer aned Robert Sutton’s book “Hard Facts, Dangerous Half-Truths, and Total Nonsense: Profiting from Evidence-Based Management,” (HBS Press, 2006). Read Chapter 5 “Do Financial Incentives Drive Company Performance?” and then re-join this discussion. One review of more than 220 studies concluded that equity ownership, for instance, had no consistent effects on financial performance – that’s none, zero. Research shows that individuals believe others are motivated by money, even as they know that they are much less so. A survey of 205 executives from diverse industries found that 68% reported their companies had executive bonus plans because senior management believed that such rewards would motivate executives. These same executives reported, however, that they did not make daily business decisions based on how such decisions would affect either their bonus or those of their people.
The problem is that the typical financial incentive system is too blunt and narrow a way of communicating what is important, unless the company has a very simple business model—where one or just a few behaviors matter. Incentive systems must be simple to be effective; people can only keep a relatively small number of things in their heads at any one time, so schemes with multiple criteria are too complex to send straightforward signals that guide behavior. However, simple signals can wreak havoc when there are multiple, interrelated dimensions of individual performance — when judgment and wisdom are required to figure out the best ways to enhance overall organizational performance.

Non-financial incentives are especially important in many situations – especially with complicated business models – if they can be made to promote intrinsic values, such as belonging, recognition, and team-spirit. I think we violently agree.

Paul — I think there’s clearly a “follow-the-leader” affect here (imagine that: leadership affecting how people behave?). If the guys at the top are obviously making incentive-based decisions (regardless of what they self-report), does anyone doubt that the guys the next few rungs down the ladder won’t do the same?
As you said: greed (or the stink of rot) starts at the top.