THE dangerous myth about employee motivation.
Sounds a bit dramatic yes?
Well riddle me this friend – a new airline wants to compete in the low-cost, low-frills segment of the US air market. Obviously the productivity and efficiency of its labour force will be essential to the airline’s success in this low cost market. Yet the company will pay virtually no one on the basis of individual merit or performance. No bonuses. No performance-based pay.
So here’s my question to you: does this new airline even stand a chance of success? …Well, you better keep reading because the answer might surprise you.
If you believed that the airline hoping to compete in the low-cost, low-frills market would not find success in the absence of using individual performance-based incentives, then you are dead wrong. In fact, you have just succumbed to one of the great myths about motivating a workforce. And this is the myth - that one of the most effective ways to make people more productive and efficient is through individual incentive compensation.
In other words – the myth is this: Individual incentive pay improves performance.
And why is it a myth?
Well sit back friend – grab a beverage (it’s 9 am here in Melbourne as I write this, so I’ve got a coffee) and allow me to take you on an journey into the weeds of team motivation.
You see, the airline I speak of is Southwest Airlines. Southwest never used a system of paying its people on the basis of individual merit or performance.
Yet, at its peak, Southwest was both the cost and productivity leader in its industry.
Which is one reason why, in business schools the world over, the case of Southwest keeps coming up again and again and again.
Right, just to drill in the point, I’ve got another one for you – here’s my question – ready? Would you have invested in a software company that didn’t offer its employees bonuses, stock options or other monetary incentives that could make them millionaires? The answer: You should have because this company succeeded mightily, growing in its first 21 years at a compound annual rate of more than 25%. The company I speak of is SAS Institute.
Instead of emphasising pay, SAS achieved an incredibly low turnover rate of below 4% - and mind you, that 4% was in an industry where the turnover norm was closer to 20%. By offering intellectually engaging work, an environment that was family friendly, and by offering other benefits and the opportunity to work with a diverse team whilst using state-of-the-art equipment, SAS, like Southwest, turned the thinking about employee motivation and compensation on its head.
Now the cases of SAS and Southwest – plus a bucket list of others – happened over 20 years ago.
So what does that mean for a manager like you, trying to guide today’s workforce?
Well the fact is that nothing has changed – in fact, the myth that individual incentive pay improves performance is more pervasive now than ever. Not a day goes by where I don’t see leaders continuing to damage their organisations by rigidly believing that the road to improving workforce cost and productivity is through incentivising individual employee performance by basing their pay on that performance.
In reality, individual incentive pay undermines performance. And I’m not just talking about the performance of the individual, but also the performance of the business as a whole. There is no shortage of studies that strongly suggest that individual incentive pay undermines teamwork, fosters a short-term focus, and it leads people to believe that pay is actually unrelated to performance and that, instead, it’s about having the “right” relationships with bosses and colleagues.
So here’s what I want to do in this post – we are going to have a look at some of the factors that account for why this myth about employee motivation is so pervasive, we’re going to have a look at the evidence that disproves the myth’s underlying assumptions, and we are going to have a look at how leaders like you and I can think more accurately and usefully about employee pay and motivation.
So as I said – we’re going to be traipsing into the weeds a little, and we’ll come out at the end a whole lot smarter (and better looking too, hopefully) because of it. Ready?
Well let’s start by finding someone, or something, to blame for this myth that individual incentive pay drives creativity and performance. Well it looks like that blame should rest squarely on the shoulders of economic theory. Specifically, we need to place blame at the feet of the economic model for human behaviour. As you can tell – I’m still undecided as to whether blame should sit on the shoulders or at the feet – but whatever aspect of human anatomy you ultimately choose for my metaphor here, you get the idea.
Right, where was I.
Yes – the economic model of human behaviour, which is taught in every business school on the planet and continues to be held true in popular press, make the woefully incorrect assumption that we humans behave rationally - that we lot walking around on our two legs strolling on our merry way out of the African savannah ready to conquer the planet are driven by the best information available at the time and that we are designed to maximise our self-interest.
According to the economic model of human behaviour, you, your neighbour, me and my neighbour take on jobs and decide how much effort to expend in those jobs based on what sort of financial return we can expect as a result.
It’s an easy assumption to make isn’t it? That if pay is not dependent on performance – so the theory goes – we won’t assign sufficient energy or attention to those jobs.
It’s a pretty bleak assumption too I reckon. But as you’ll see, it’s also a lazy one.
And thankfully it’s mostly horse shit. A far as employee motivation goes anyway.
The problem with this economic model of our behaviour is that it portrays employment as something that is repellent or aversive. It implies that the only way that you or I can be induced to work is through some sequence of rewards and sanctions.
This is what professor Jame’s Baron, of Stanford’s Business School has to say on this: “The image of workers in these models is somewhat akin to Newton’s first law of motion: employees remain in a state of rest unless compelled to change that state by a stronger force impressed upon them – namely, an optimal labour contract”.
Worse still, as the economist Robert Frank puts – these theories of how we behave are too often self-fulfilling. He essentially says that businesses often act on the basis of these theories, and through their own actions produce in employees the behaviours expected.
For example, if I was a business and I believe that my people will work hard only if I specifically reward them for doing so, then I will provide rewards that are contingent on that hard work - thereby conditioning my people to work only when they are rewarded.
Alternatively, if I, as a business, expect my people to be untrustworthy, then I will closely watch and control them. And in doing so, I will signal to them that they cannot be trusted. This untrustworthiness ultimately then becomes an expectation that they will conform to.
Now there’s one other factor that helps in advancing this myth about employee motivation above most others. It’s the compensation-consulting industry – you know, the so-called expert folk that corporations usually pay big bucks to come in and tinker with employee pay systems with the promise to improve employee performance – well as you’ll see, it’s that industry that has a few perverse incentives to keep the myth well and truly alive for the rest of us.
The first incentive is that, for many consulting firms, advice about pay is their bread and butter. So although the evidence suggests that there are much more effective ways to improve workforce performance than by tinkering with employee pay packets, it’s probably too much of a selfless behaviour to expect advice like this from these firms.
The second perverse incentive to keep the myth alive is that tinkering around with employee pay is far simpler for managers than to go about changing organisational culture, the organisation of the work that the business performs and the amount of trust and respect the organisation portrays. And of course, it’s an even easier option for the consultant who advises these managers to do so.
Ok, so those are the factors that contribute to the myth that individual incentive pay improves employee motivation and performance. But what about what’s happening right now?
Well take a quick google search and you will find that the number of companies that use individual incentive pay – like bonuses and commission pay - for their workforce continues to increase, while the proportion of companies that use profit sharing (which is a much more collective employee reward system) continues to drop. And that’s the case across most of the western world.
But get this, despite the popularity of individual incentive pay as a means of driving employee performance, the problems are many and they are very well documented.
Individual incentive pay has been regularly shown to undermine teamwork, it drives employees to focus on short-term gains at the expense of sustainable long term progress for the business, and it lead employees to associate compensation with office-political skills, relationships and ingratiating personalities rather than to workplace performance.
It’s for this reason that so many quality experts, including William Demming – who was widely known as the leading management thinker in the field of quality - to so strongly argue against using individual incentive pay schemes.
As study after study shows – which I’ll link to in the notes below – merit-based pay almost always has no positive effect on office performance.
Take Sears for example, who was forced to eliminate its own commission pay system when officials found widespread consumer fraud throughout its automobile stores in California. Sears staff, eager to make sales and earn commissions on repair sales, were found to be selling unneeded services to unsuspecting customers.
Or take Highland Superstores, an electronics retailer, who eliminated commission pay after finding that the system encouraged such aggressive sales behaviour that customer left feeling alienated.
And even when merit-based pay systems are based on objective indicators, like the time taken to perform a specified task, employees exhibit no difference in performance after the introduction of a merit-based pay system.
Contrast this with a study on a manufacturer of exhaust system components who eliminated individual incentive pay and introduced a more group-oriented compensation system. Here, employee grievances reduced, product quality increased nearly tenfold, and perceptions of teamwork and concern for performance all improved.
So the conclusion is pretty straightforward: most individual merit or performance-based pay systems share two attributes: they absorb vast amounts of management time and resources, and they make everybody unhappy.
Ok, so you’ve heard that individual incentive pay is pretty much going to be a universally a rotten idea if what you are trying to do is motivate your employees.
So what can you do? Well part of the answer lies in group-oriented compensation systems.
Now before I get into the benefits of moving towards group-oriented compensation systems – let me lay to rest one concern that so often gets voiced when the possibility of removing individual incentive pay, and replacing it with group-oriented compensation, is raised.
It’s the so-called “free-rider” problem. Essentially, the concern or argument is that employees under a group-oriented compensation system will not work hard because they know that if rewards are based on collective performance, and their colleagues make the effort, they will share in those rewards regardless of their individual effort.
Well, let it be known that this argument to avoid a group-oriented compensation system fails for two reasons.
One is that, very much to the surprise of those who spend their time devouring economic texts, empirical evidence from a multitude of studies shows that the true extent of free-riding is actually pretty limited. As one meta-analysis shows – which I’ll link to in the notes below – when under the conditions that raise concerns about free-riding, employees more often than not end up cooperating with each other instead.
The second reason that free-riding shouldn’t be a concern is this. The fact remains that individuals do not make decisions about how much effort to expend on a given task in a vacuum. They are heavily influenced by the social relationships they have with workmates and peer pressure that exists within a business. This influence is potent. And even though this influence might be at its strongest in smaller groups, it is a force that still considerably mitigates against free-riding even in much larger teams.
So it really should come as no surprise that those businesses who pay on a collective basis, through profit sharing, gain sharing or otherwise, almost always outperform those businesses who don’t.
Why? Because people want more out of their jobs than just money – they want an enjoyable work environment.
This doesn’t mean that the work needs to be easy – far from it – it means that people seek a work environment that is fun and meaningful. An environment where they can use their gifts and skills whilst working with others in an atmosphere of mutual respect.
So there’s a certain logic coming through here isn’t there. That any business believing that it can solve its problems in attracting, retaining and motivating its people solely through tinkering with its compensation system is likely not spending the time and effort it should be on the wider work environment. Spending time and effort on things like better defining its jobs, better creating and nurturing its culture and on injecting fun and meaning into the work it performs.
Of course, this all comes down to how managerial time and attention is distributed doesn’t it. How scarce managerial resources are put to use. But here’s the thing – the time and attention you choose to spend managing your employee compensation system is time and attention you don’t have to devote to other aspects of the work environment – which may, ultimately, be much more critical to your success and the success of your team.
So that brings us to the biggest question of all – what do you need to do to actually get employee motivation right?
Well for starters, go ahead and see what happens when you include a large dose of collective rewards in your employee’s compensation packages.
Next, choose an aggregated unit to measure performance. The more aggregated the unit you choose to use to measure performance, the better placed you will be to measure that performance.
Put another way, it’s pretty simple to accurately tell how well a business has done with respect to sales, profit, productivity and quality. What’s more difficult is trying to decipher which individual employee is responsible for exactly how much of quality, sales or productivity. In fact, it’s not just difficult, more often than not its nigh on impossible.
It was probably said best by Nobel-prize-winning economist Herbert Simon who recognised that people in organisations are interdependent, and therefore the results of the organisation are the consequence of collective behaviour and performance.
And what about the task of fighting the myth that employees are primarily motivated by money? Well you fight it by de-emphasising pay in your business, by not portraying pay as the main thing you get for working at your business. How? Take a lesson from Tandem Computer – before it was acquired by Compaq. During recruitment, Tandem would not tell candidates their salary unless it expected them to accept a job. In the event that they did ask what their pay would be, they would simply be informed that Tandem paid good competitive salaries.
The reasoning for this was pretty simple – Tandem’s philosophy was that if you came for the money, you would leave for the money. And Tandem wanted people who were there for the culture, because they liked the work, and not because it provided something – that something being money – that every company could offer. Tandem wanted to avoid emphasising pay as the primary reward because it would encourage people to come and stay for the wrong reasons.
The other thing you might want to recognise is that pay has symbolic components. By signalling what and who within the business is valued, it is pay that both reflects and helps determine your culture. So it’s critical that your messages to staff about pay practices are communicated as intended.
For example, talking about the value of teamwork and cooperation but then neglecting to incorporate a group-based component into the pay system matters because paying solely on an individual basis signals to employees what the business believes is actually important – which is individual behaviour and performance.
Similarly, talking about the importance of all people in the organisation, but then paying some disproportionately more than others or paying large executive bonuses while laying off people and asking for wage freezes all goes to considerably muddy your message.
I think you get the idea.
Another practice used to better align pay and company culture is to make pay structures public. This sends a powerful symbolic message too. While some businesses reveal salary distributions by position or level, some – like Whole Foods – actually make the data on individual pay available to all members who are interested. Yet others choose to maintain a high level of secrecy about pay. I ask why? What messages are those businesses sending? Keeping pay a secret suggests that the company has something to hide or doesn’t trust its employees with the information.
In addition, keeping things like pay secret just encourages people to uncover those secrets – after all, if something is worth the effort of hiding, then it must be interesting and important enough the spend effort and energy in uncovering it, right?
There’s no denying it, compensation systems that are more open and transparent send a really positive message about the equity of the system and about the trust that the business places in its people.
The second last tip is that managers should consider embracing other methods, besides pay, to signal company values and focus behaviour. As I’ve already laboured on about, it’s not easy to design an incentive system that can’t be gamed. So instead of using your pay system to signal to employees what is important, take the much simpler route: just tell your people what is important for the business and why.
Yep it’s simple, but it will result in more nuanced and rapid changes in behaviour because your business won’t have to change its compensation system every time the priorities of the business are altered a little. Try it – actually talk to your people about what is important and why, instead of just trying to send subtle messages through your compensation system.
The last tip – and perhaps most importantly – is that pay needs to be seen for what it is: just one single element among a broad set of management practices that either build or diminish teamwork, motivation and performance. So take a moment, take a step back and think deeply about whether your businesses’ compensation practices are congruent with your other management practices and reinforce rather than oppose their effects.
And that’s it. Don’t be afraid to challenge the myth about employee pay and motivation. Of course it’s easier and less controversial to see what everyone else is doing and follow along with that. But don’t. Look at the evidence and take the more sophisticated approach. Do what you need to do to transcend the myth and accept that pay cannot substitute for a working environment that is fun, high on trust, and full of meaningful work.
Are you wondering where these ideas came from? Well you can go further, and I’d encourage you too, by taking a look at my organisational wellbeing hero’s work – Jeffrey Pfeffer in his extensive article, Six Dangerous Myths About Pay in the Harvard Business Review. It’s a bit of a slog, which is why I wanted to summarise a bit of it in this post, but I’m sure you’ll love it - I’ll link it up in the notes below.
That’s it for this week. Thanks for reading.
Please take care of yourselves, and I’ll see you again next week!