Surface Ripples

Imperfect Incentives

In a recent article, I wrote about the inherent problems with incentive schemes. The simple matter is they involve human beings.

I concluded that it was well-nigh, impossible to design the “perfect” incentive scheme as those incentivised will usually find shortcuts around the system.

On reflection, I realised that this was a cynical and (dare I say) destructive view. Whilst it highlighted problems of which I am sure we’re all aware or have at least experienced in our day-to-day lives, it didn’t offer any guidance as to how to improve the situation.

So, what can we do? The first area of focus, I feel, should be the values of the organisation: what does it stand for? How does it want to be seen? What does it want its customers to say about it? How does it want its employees to treat customers? How does it want its employees to feel about working for it?

Next, consider the behaviours and results that would provide the answers to these sorts of questions.  There will be a mix but try to have as many objective measures as possible. 

From there, move onto questions like “if we want to see this sort of behaviour, how can we encourage it?” The answer, you will say, is to reward such behaviour.

Remember the caveat though: make sure that it is difficult to shortcut this behaviour and incentive. If you ever want to know how employees game your system, ask them!

We now have the results and behaviours we want and the rewards to encourage them.  How do we measurethem? In some cases, it might be easy: there are figures available in the company’s “systems”.  Other methods are trickier and involve “customer feedback” - itself inherently flawed, as we’re asking strangers to evaluate behaviours, activities, and products based on their own subjective expectations. For example, what may be “excellent” for one person may be “average” for another.  Where possible, a properly briefed “Mystery Shopper” may be the answer. 

One thing we can say for certain is that absent incentives, either nothing or the wrong things are likely to happen.

Another point is that, if the incentives are insufficient for “good” behaviour or there is insufficient/no disincentive for “bad” behaviour, again nothing will happen. I have personal experience of this with one job I did where people actually said that the incremental difference between the salary raise they got for a “Very Good” performance rating was barely sufficient to justify the effort required over that which resulted in a “Good” rating.

On top of all this, employers only have a certain amount of money to play with when it comes to rewarding employees (assuming that money is what they value).  Yes, “other things” such as praise, time off, or other non-financial rewards can incentivise people, but money remains the key in an age of rising prices.  A nice, modern, well, equipped office, free coffee (and even meals), ping-pong, tables, beanbags, gym, memberships, childcare, facilities, medical and dental care, all help but I’ve worked for organisations that have compensated people both with just salary (and a high one), allowing employees to decide what they spent it on as well as for employers who paid lower salaries, but then gave the benefits-in-kind above as part of the “deal”.

It's up to employers to decide how they to reward their employees (particularly good ones) as well as to employees to decide whether they want a higher financial reward and decide how they spend it or whether they accept a lower financial reward but to have, say, funded healthcare, dental care or childcare. The latter for working parents can be a critical factor.

Conclusion: each employer is going to have to mix and match, depending on the market in which it operates, how its competitors compensate their employees, the culture of the market and innumerable other factors. Getting it right, will continue to be a guessing game and requires a high degree of flexibility, understanding, and insight.

To this mix, we must factor in changing generational aspirations. Some workers will naturally value certain elements of compensation more than others, whilst their younger colleagues may show different preferences. In short, poor old HR not only have to manage an incentive scheme, but one that responds to the needs of different generations!

I suspect that in the end money will remain a prime consideration.

I am more than willing to be proved wrong. I do not want to accept that only money is the way forward.

I’ve spent more than half my life delivering change in different world markets from the most developed to “emerging” economies. With a wealth of international experience in international financial services around the world running different operations and lending businesses, I started my own Consultancy to provide solutions for improving performance, productivity and risk management.  I work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email. My website provides a full picture of my portfolio of services.  

Labels: Career, Financial, Productivity, Strategy

posted by William Martin @ 08:23