Incentives Suck!

I grew up believing in the Religion of Incentives--if you give employees the right incentives, you will increase their performance. Furthermore, people won't really perform well unless they have the right incentives. I had this Religion practiced on me by several employers in my twenties and thirties. Somehow, the practice of the Religion always seemed unfair, political, and unproductive. Sometimes I won, knowing often I had been lucky; sometimes I lost, knowing I had been unlucky.

I remember one application of the Religion--the call reporting system at a pharmaceutical company. We were supposed to call on six physicians a day and give two major and two minor presentations during a 15-minute call. The bosses decided to incent us to make more calls and more presentations per call. They tied our bonus checks into incentives based on increasing the numbers. We had a call reporting system in which we filled in a form reporting both calls and presentations. Guess what, the bosses were right, the number of calls and number of presentations per call increased dramatically, and everybody got their bonuses. Incentives worked!

But, wait a minute, there was an independent detail audit in which doctors reported on the number of calls made by each company's representative and the number of presentations made. Guess what? During the same period the company call reporting system said the calls were increasing, the audit showed them as decreasing both in the number of calls and in the number of presentations! It seems it was easier to fudge the report than make the calls.

Then, I started my own technical writing and training business. For five years I tried various incentive systems for production. Mostly, it was the old rating system where I and my managers decided on a scale of one to ten the productivity of employees and also ranked them against each other. Somehow there was always bickering and backbiting among employees. Fingers got sore from pointing so much in blaming others. Also, I always seemed to be the last one to know when something wasn't going right.

Then, I read W. Edwards Deming, the quality guru who helped the Japanese learn quality after WWII. Deming was an atheist about the Religion of Incentives. He went further than that. He was an outright enemy of the Religion. Why, because incentives don't work. They corrupt the communication system in the company; they focus the organization on individual performance instead of on the system within which people work; they optimize part of the overall system and sub-optimize the rest; they reward the lucky and punish the unlucky.

I abolished incentives. Employees henceforth got a cost of living raise each year on their anniversary date, the size being announced in January of each year and depending on the company's prospects. Likewise, at the end of each year, if the company had been profitable, we took 10% of the profits and distributed it equally to everybody. That's right, the secretary got the same bonus dollar for dollar as the technical writer and the same as the project manager and manager.

The bickering stopped overnight. The employees had become a team and weren't competing with each other and being unfairly judged. People no longer withheld bad news because they weren't punished for revealing it. Blame went out the window. The philosophy became, "Let's improve the system so this won't happen again." Productivity went up 30 percent because employees, focusing on improving the system, figured out a way to do things faster.

Peter R. Scholtes is principal author of The Team Handbook. He was an instructor in Dr. W. Edwards Deming's seminars for six years. He operates a consulting and seminar business based in Madison, Wisconsin. He wrote a good article explaining just why Deming opposed incentives. It starts with an example:

"My friend Dave from Indianapolis was upset. His daughter Emily had been a good student, an avid reader ... that is until Pizza Hut got into the reward business. It seems Pizza Hut provided teachers with coupons for free pizzas to be awarded to a student when he or she had completed a book. Dave's daughter started reading shorter and less challenging books or just skimmed longer books, so she could get more coupons.

Meanwhile, Emily's classmates also started reading more books. Even those who were not readers started reading. The books they read were short and simple, but at least these kids were reading something. The students who, like Emily, were avid readers, switched their reading preference to short, simple books. Eventually, however, Pizza Hut's reading-for-pizzas campaign ended; and so did the reading ... all reading ... by those who used to be avid readers of challenging books as well as by those who didn't read.

"What my wife and I unwittingly allowed Pizza Hut to do," said Dave, "was substitute their external motivation for our daughter's internal motivation. They replaced her reason for reading and then eventually removed their substitute reason." With pizza coupons no longer available, the kids in the class felt that there was no longer a reason to read.

This story -- a true incident -- demonstrates the fallacy of all incentive programs." More....http://pauillac.inria.fr/~lang/hotlist/free/licence/papers/
reward/scholtes.html