Chief Executive Briefing  # 3

The Myth of Incentive Pay

There are three basic reasons to introduce an incentive pay program.  They are:

1.    Change employee behavior

2.    Share company profits

3.    Replace fixed costs with variable costs

All three reasons put some portion of the employee’s income at risk.  Considering the fact that most employees are risk adverse, most variable pay programs eventually end up being negative in the mind of the employee.

When employees get something extra they feel good, but when it is not there they feel it has been taken away.  For example, all profit-sharing programs have inherent in them a loss-sharing element.  Most employees view not getting a profit, as a loss.

To determine if a profit sharing program would be of value to your employees, ask them if they would be willing to participate in a profit and loss sharing program.

An important distinction should be made between incentive pay and variable pay.  A profit sharing program linked to well defined employee behaviors would be an incentive program, while a profit sharing program designed solely to share the wealth would be a variable pay program.

Although both types of programs (incentive and variable) have the potential to de-motivate employees, it is the incentive programs that are fatally flawed and the subject of this report.

According to Peter Drucker, the system by which merit is appraised and rewarded is: “The most powerful inhibitor to quality and productivity in the Western World.  It nourishes short-term planning, builds fear, demolishes teamwork, nourishes rivalry and leaves people bitter.”

The Problem with Extrinsic Rewards

Most rewards are in effect, bribery.  Most reward systems are put in place to benefit the giver, not the receiver.  “If you do what will benefit me, I will give you this.”  Most humans resent and resist being controlled in this manner.

Rewards punish.  Rewards are every bit as controlling as punishment, even if they control by seduction.  “Do this and you’ll get that” also includes the threat of punishment. “Don’t do this and you won’t get that.

Rewards must be continued.  If rewarding a behavior increases the frequency of the behavior, then eliminating the reward should decrease the frequency of the behavior.  Once a reward system is put into place it must remain in place to sustain the behavior.

The more rewards are used, the more they are needed.  Reward systems create a dependency in employees on rewards to motivate behaviors.

Rewards automatically become entitlements.  This is especially true when the reward is given rather than earned.

Rewards destroy corporation and teamwork.  Getting rewarded for individual effort discourages teamwork and identifies everyone else as a potential obstacle to one’s own success.

Rewards change the reason why employees do things.  Rewards motivate employees to get rewards.

Rewards ignore reasons for behavior.  Rewards focus on eliciting a behavior in an employee and do not consider why the employee is behaving a certain way.  Addressing the cause or root of the problem is better than simply addressing the problem.

Rewards discourage risk taking.  When we are working for a reward, we do exactly what is necessary to get it and no more.

Rewards destroy intrinsic motivation.  Intrinsic motivation is doing what one does for its own sake.  Many of the things employees do outside of work are intrinsically motivating.  Some examples are working on cars, participating in a sport and learning how to cook.

Intrinsic motivation is the most desirable, long lasting and strongest form of motivation.  Extrinsic rewards destroy intrinsic motivation.  It changes the reason why employees do things.

Rewards devalue the behaviors that produce the rewards.  The end (reward) becomes more valuable than the means (behavior that produces the reward).

Rewards destroy interest in the behaviors that produce the reward.  Children who are told if they play with crayons they will be allowed to play with felt tip pens, lose interest in playing with crayons.  Conversely, children who are told if they play with felt tip pens they will be allowed to play with crayons, lose interest in playing with felt tip pens.

The Problem with Contests

Contests create false scarcity.  Contests imply that only a few employees are worthy, when in fact many may be worthy.

Contests reward those who don’t need it.  To reward your top performing sales person is to reward the sales person who is already motivated.  The challenge is to motivate those persons who are not motivated.

Contests destroy teamwork.  It is not possible to get employees to cooperate when they are rewarded for competing.

The Problem with Recognition

One person’s gain is everyone else’s loss.  The employee of the month may gain, but everyone else loses.  Recognition creates a false sense of scarcity.

The Problem with Praise

Praise involves an individual value judgment.  Praise is often seen as condescending.

Praise is often manipulative.  Praise is most often given to benefit the giver, not the receiver.

Praise in public creates resentment.  It is better to reprimand in private and praise in private.

The Problem with Money

Money is not a motivator.  However, money can easily be a de-motivator.  When people are asked what motivates them, they seldom mention money.  When asked what motivates their employees, they most often mention money.

How to Nurture Authentic Motivation in Employees

Hire employees who are intrinsically motivated by work.  Extrinsic short-term motivation is easier to achieve in employees than long-term intrinsic motivation.  The easiest approach is to hire employees who are already intrinsically motivated in their work and other aspects of their lives.

Abolish incentive programs.  Incentive programs destroy intrinsic motivation and should be avoided.

Abolish performance appraisals.  Performance appraisals that rank, rate and judge employees should be avoided.

Abolish recognition programs.  These programs create a false sense of scarcity, when in fact most of your employees may be worthy of recognition.

Provide opportunities for employee collaboration.  Create an environment that fosters teamwork.

Provide employees with the opportunity to do meaningful work.  Meaningful jobs usually offer the opportunity to learn new skills, experience some variation in tasks and acquire and demonstrate competence.

Empower employees and hold them responsible.  Humans have a strong need to have control over their lives, but at the same time they can not have this freedom without also accepting the responsibilities that goes with the freedom.

Create an environment that shows the utmost respect for all employees.  The best way to communicate respect to another human being is to ask that person for his or her opinion.  Employee feedback programs are arguably the best nurturers of intrinsic motivation in employees.

Pay your employees well.  Better employees can demand higher pay.  To get them you have to pay the higher price.