Pros & Cons of Pay for Performance

Somewhere in Corporate America, a human resources manager is tweaking her company’s employee-incentive program. Maybe she’s dumping last year’s customized giveaways for this year’s weekend getaway packages. Perhaps she’s jettisoning the annual casino-awards party in favor of discreet distribution of personalized thank-you cards. What drives her is the theory that rewards and bonuses motivate employees to do their jobs better.

Still, it’s only a theory — and one that a number of CEOs and human resources managers believe is no more valid than the notion that dispensing food to a rooster every time he pecks the piano guarantees he’ll soon play Beethoven. In fact, no one out there really knows if incentive programs truly work, and a number of you are convinced they can cause significant harm.

Pondering proffers.
Are incentive programs good for the company or bad for morale? It depends on whether the rewards help support corporate goals, such as increased profit and customer loyalty, or if they merely engender unhealthy competitiveness and back-stabbing among employees.

Seven years ago, CEO and president Rob Rodin eliminated all individual incentives for the 1,800 employees at Marshall Industries, an El Monte, California-based distributor of electronic components. To your average outsider, this may have seemed like a great way to cripple an entire workforce-take away the American Express certificates and Alaskan cruises and motivation drops faster than a helium balloon rises. After all, who wants to slog away at work if there’s no food in the dispenser?

Rodin analyzed the five-year earning potential of each employee, concocted a formula, then went person-by-person and assigned salaries. Profit-sharing potential was set at the same percentage figure for each employee, regardless of salary, based on the company’s overall performance. “It wasn’t as if we imposed communism,” Rodin says, “but our company was divided by internal promotions and contests. We weren’t working together with a common vision. Managers were fighting over the cost of a new computer because no one wanted to put it on his P&L, and departments were pushing costs from one quarter into the next to make budget. Fundamentally, we eliminated these distractions. Now we have collaboration and cooperation among sales people, and between divisions and departments.”

And, he says, productivity per person has almost tripled.

Last year in Portland, Oregon, president and CEO Mary Roberts discontinued a bonus program for the 200 employees at Rejuvenation Inc., a company that manufacturers decorative brass lighting fixtures. The manufacturing managers, Roberts maintains, begged her to discontinue the program because craftsmen were stealing parts from other craftsmen to meet quotas, and workers were pacing the production of fixtures to gobble up overtime, then working like maniacs to achieve production bonuses.

“Incentive programs create competitiveness, and that’s not necessarily best for a company like ours that’s growing,” says Roberts. “I don’t think people are motivated by rewards and bonuses. I think they’re motivated because they’re excited about their jobs or because they’re doing something that provides a service to the world.”

Then why do so many companies claim otherwise-that incentive programs, administered effectively, improve company performance? “Personal recognition can be more motivational than money,” asserts Bob Nelson, author of 1001 Ways to Reward Employees (Workman Publishing, 1994). “You can obtain from your employees any type of performance or behavior you desire simply by making use of positive reinforcement.”

At Dallas-based Texas Instruments (TI) Incorporated, rewards are used to foster loyalty. Recruiting and retaining employees is a nasty battle zone in the competitive semiconductor industry. Therefore, the company offers a unique and creative compensation package that includes bonuses as well as non-cash recognition ranging from personalized plaques to country ranch parties, movie tickets to golf lessons, team shirts and jackets to footballs and train kits. The number of TI employee recognitions between 1996 and 1997 jumped 400 percent from 21,907 to 84,260.

“Our managers wouldn’t use a non-cash recognition program if it didn’t bring value to the employees,” says Kathy Charlton, TI’s manager of workplace vitality. “We’re part of an aggressive industry. Our people work hard and long hours. Rewards make a difference in their attitudes and performance. Hey, everyone has a need to be recognized, and not just once a year when there’s a formal review process. And when recognition is tied to effort, you end up getting more bang for your buck.”

Do rewards undermine corporate goals?
It’s wildly unrealistic to assume that all incentive programs work, or that by taking away individual rewards, productivity per person will triple. Maybe that’s why commissions and bonuses and other rewards programs seem always half-assembled-no one has figured out yet how to devise the perfect system. Even though TI’s Charlton emphatically defends her company’s incentive programs, she has never been able to definitively link motivation and productivity to non-cash rewards. And although Marshall Industries’ CEO Rodin loves to trumpet his company’s new nonincentive system, some naysayers claim that, for example, salespeople will never perform without commissions.

According to a 1996 survey sponsored jointly by McLean, Virginia-based Wirthlin Worldwide and O.C. Tanner of Salt Lake City, 78 percent of CEOs and 58 percent of HR vice presidents say their companies feature rewards programs recognizing performance or productivity. Two-thirds of each group report their interest in service awards is constant, while about one-quarter claim their attraction to such programs is actually increasing.

“If you want to impact the bottom line, you must invest in people, and not just with money, but also with recognition rewards,” says Steven Kimball, director of communications with O.C. Tanner (a provider, it should be noted, of corporate service/recognition award programs). “It’s a matter of common sense and motivation theory that has been with us forever that says people work for more than just a paycheck. That should be proof enough.”

However, John Parkington, practice director of organization effectiveness for the San Francisco office of Watson Wyatt, argues that in the past two decades, companies focused too much on measuring efficiency and production. In the process, he says, they weeded out anyone with entrepreneurial spirit. In other words, if you wanted to speed up the assembly of, say, brass lighting fixtures, and you weren’t particular about quality, workers could be spurred to meet quotas by financial incentive. But that’s not exactly want employers today want. These days, they want someone to design software that speeds up the assembly line.

The new economy demands that employees at every level be creative problem solvers, and this is where it gets sticky for managers to design strategies for creating high-performance organizations. “Now companies are asking themselves: ‘What can we do to reward people for solving problems, for being innovative and for growing the top line,'” explains Parkington. “Managers have to be smart and inventive enough to figure out new ways to reward their employees for this sort of behavior.”

But can you encourage this kind of thinking with team shirts and train kits? Parkington believes a company that wants people to take job-related risks must let employees know what’s expected of them, offer them encouragement, provide the resources for innovation and proffer rewards with perceived value.

Certainly, money isn’t the only incentive for people to stay with a company. In a 1998 “American @ Work” survey conducted by The Loyalty Institute of Aon Consulting in Chicago, 1,800 employees ranked pay only 11th as a reason for remaining with an employer, behind such factors as open communication with managers, ability to challenge the status quo, and opportunities for personal growth. Money is especially weak as an incentive when it comes to encouraging employees to think more creatively.

Be careful not to punish employees with rewards.
Non-cash rewards don’t engender increased quality, productivity or creativity, either, says Alfie Kohn, one of America’s leading thinkers and writers on the subject of money as motivator, and author of Punished by Rewards (Houghton Mifflin, 1993). He believes rewards programs can’t work because they’re based on an inadequate understanding of human motivation. One of the most thoroughly replicated findings in social psychology, he points out, is that the more you reward people for doing something, the more they tend to lose interest in whatever they did to get the reward. And when interest declines, so does quality.

“You can get people to do more of something or faster for a little while if you provide them an appealing reward,” says Kohn. “But no scientific study has ever found a long-term enhancement of the quality of work as a result of any reward system. Bribes and threats can get you a short-term effect, but that’s it.”

Kohn says rewards may actually damage quality and productivity, and cause employees to lose interest in their jobs. Why?

• Rewards control behavior through seduction. They’re a way for people in power to manipulate those with less power.
• Rewards ruin relationships. They emphasize the difference in power between the person handing out the reward and the person receiving it.
• Rewards create competitiveness among employees, undermining collaboration and teamwork.
• Rewards reduce risk taking, creativity and innovation. People will be less likely to pursue hunches, fearing such out-of-the-box thinking may jeopardize their chances for a reward.
• Rewards ignore reasons. A commission system, for example, may lead a manager to blame the salesmen when they don’t meet quotas, when the real problem may be packaging or pricing.

“Managers typically use a rewards system because it’s easy,” adds Kohn. “It doesn’t take effort, skill or courage to dangle a doggie biscuit in front of an employee and say, ‘Jump through this hoop and this will be yours.'”

The bottom line on growing the top line.
Cara Finn is vice president of employee services at Mountain View, California-based Remedy Corp., a software company that builds and distributes applications for business processes. To remain competitive in the hothouse of Silicon Valley, her company during the last four years has doled out to some 750 employees incentive rewards ranging from American Express gift certificates to spot bonuses and movie tickets. Only recently has Finn structured a “quality of life” program in which employees receive rewards after they’ve been with the company three, five or seven years.

“You can’t separate longevity from performance,” she says. “If an employee has been with our company for three years, he’s performing.” And because Remedy is a publicly-held company, with the attendant inevitable ups and downs, Finn believes rewards also help even things out. “We hold tightly to the philosophy that rewards are good, but they should neither be a deterrent nor a reason for someone leaving or coming to our company.” Instead, the suggestion coming out of the Chicago-based National Association of Employee Recognition is to change your corporate culture using positive reinforcement on a daily basis to transcend those traditional programs that so often feel manipulative.

Barry LaBov, CEO of the Fort Wayne, Indiana-based LaBov & Beyond, a marketing communications company, suggests every good human resources professional find new ways to offer incentive rewards that help support specific corporate goals. “People are people and they want to be recognized,” he says. “The programs that fail revolve around rewarding performance that doesn’t support company goals. Improving sales performance, for example, is not enough. Today you need programs that support such issues as profitability, loyalty and customer satisfaction. And you have to do it without alienating other people within the organization.”

If you’re one of those people who still can’t take it as gospel that the more you reward an employee the more he or she gets innovative and creative – because it’s not just about the money in the first place – then maybe you need to listen to Kohn, who still firmly believes there’s a solution to all the madness surrounding employee incentive and rewards programs. Sure you can motivate people with the proverbial carrot and stick, he says, but motivate them to do what? To work for the long-term interest of the company, or for some short-term personal goal? “Rewards are a matter of doing things to employees,” he stresses. “The alternative is working with employees, and that requires a better understanding of motivation and a transformation in how one looks at management.”

Kohn quotes from management theorist Frederick Herzberg, who said: “‘If you want people motivated to do a good job, give them a good job to do.'” In other words, create an organization in which people feel a sense of community, maximize the extent to which employees are brought in on decisions large and small, and “dump your company’s rewards program,” adds Kohn. “You need to pay your employees well, pay them fairly, and do everything possible to get their minds off money and on work.”

Of course, the elimination of commissions and other rewards programs doesn’t guarantee quality. In reality, it takes real talent and courage to create a workplace in which employees feel important, where their work matters to them, and where they care about each other-with or without an incentive program.

Workforce, February 1999, Vol. 78, No. 2, pp. 68-72.