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Dilbert (And Others) On The Creation Of Incentives…

August 7th, 2009 · 9 Comments
Incentives

Has it ever occurred to anyone that having employees design incentives is a bit like letting the foxes run the henhouse?

Lessons to learn:

  1. Incentives don’t work if they are insulting, stupid, seemingly arbitrary or creepy.
  2. Even during a recession, the threat of getting fired is really not a great incentivizing force. At best, it gets people to put in exactly the minimum effort to not get fired (and really screws with morale to even threaten to fire people), and it’s surprisingly hard to actually fire someone for cause in most companies.
  3. This is the same sort of circular reasoning that makes it hard to just hire a manager to monitor employees…don’t you then have to hire another manager to make sure that the first manager is doing his job? And a third to make sure that the second is doing his job? etc.
  4. Simply allowing the creators of an incentive to get the incentive itself is not a solution to the problem- wouldn’t the incentive designers just set up the criteria so that they would benefit the most from the incentive? Duh.

This article gives a similar perspective as the Dilbert cartoon. Though titled “Incentive Pay Considered Harmful,” the article is mainly referring to silly awards like the one referenced above. To quote the opening paragraph:

“Mike Murray, a surprisingly hapless HR manager at Microsoft, made a number of goofs, but the doozie was introducing a “Ship It” award shortly after he started the job. The idea was that you would get a big lucite tombstone the size of a dictionary when your product shipped. This was somehow supposed to give you an incentive to work, you see, because if you didn’t do your job– no lucite for you! Makes you wonder how Microsoft ever shipped software before the lucite slab.”

While I don’t agree with the overall conclusion that incentives can never work, I do like the point regarding happiness versus disappointment with performance reviews. The general idea is that people are overconfident or optimistic enough that a good performance review can’t really come as a positive surprise. As a result, people are either neutral or disappointed by their reviews, which is counterproductive to a large extent. I am thinking about how to design an experiment to get at these sorts of effects.

On a sidenote, am I the only one that gets particularly upset when money is spent to buy stupid recognition items that no one really wants? It irks me mainly on principle, since I am rarely cooperative enough to get such an item. Nonetheless, I cannot get over the inefficiency due to the fact that the recipients of the lucite slabs likely don’t even value the award as much as it cost to buy the physical incarnation of it. If a manager wanted to do better, he could give cash instead…but then it would be painfully obvious exactly how cheap the award really was. To illustrate, I remind you of a scene from The Office (a recurring favorite of mine):

Angela: Gift baskets are… the essence of class and fanciness. They are the ultimate present that a person can receive.
Dwight: What about cash? With cash you can buy whatever you want, including a gift-basket, so… it’s kind of the best gift ever.
Jim: What about a gift basket full of cash?
Andy: Yes! Cash-basket! Nice work, Tuna.

(For the record, I think B.J. Novak’s college roommate was an econ major. That could explain a lot.)

Tags: Incentives

9 responses so far ↓

  • 1 Rev. Pfloyd // Aug 7, 2009 at 7:06 pm

    My old company (before I became an unemployed economics student/bum) had an interesting incentive called PAR pay (PAR was Perfect Attendance Record), which they used for production workers. Basically how it worked was if you had perfect attendance during a pay period you made an extra dollar an hour for that entire pay period.

    Of course if you took a day off, went on vacation, or were even a minute late to work, you didn’t receive it. But it sure helped attendance quite a bit.

    Of course, per the law of unintended consequences, there were quite a number of workers who got speeding tickets or tried to beat the train (as our company was near a train crossing) which, in the case of the tickets, cost the worker about double what he would have loss just accepting being late.

    Of course, it probably was a boon to the town coffers; especially once the traffic cops figured it out and knew where to wait and at what time to maximize pull-overs for speeding.

    There’s a whole cost/benefit and risk assessment thing right there. . . .

  • 2 JThompson // Aug 7, 2009 at 7:26 pm

    Recently our incentive program changed at my job. It used to be that if we reached the group goal, we all got lunch. The lunch was always mediocre at best. The main problem was that as a group we set our own goals.

    It was changed so that only the top five producers got lunch. The quality of the lunch was greatly improved. Over the past four months the same five people have got lunch. The interesting thing is that everyone else’s performance has not improved, or even stayed the same, it has worsened. The “incentive” program has caused most people to believe that they have no opportunity at being one of the top five producers. This has in turn caused the employees to work even less. Interesting how incentives work.

  • 3 Rev. Pfloyd // Aug 7, 2009 at 7:40 pm

    Yeah, I worked a job several years ago that was like that (and I went into detail about it in another one of the blog articles on here). Basing performance purely on “production output” seems to create a lot of other disincentives in other parts of the job (like not doing machine maintenance).

  • 4 Tony // Aug 7, 2009 at 11:19 pm

    “Even during a recession, the threat of getting fired is really not a great incentivizing force. At best, it gets people to put in exactly the minimum effort to not get fired (and really screws with morale to even threaten to fire people), and it’s surprisingly hard to actually fire someone for cause in most companies.”

    I totally agree.

    My wife works at a Macy*s store where one of the favored “management techniques” is to threaten firing people if they don’t meet such-and-such goal.

    Her coworkers consistently fail to meet goals, yet the only cases where people have been fired in the past year are when the sales associate was stealing from the company… literally stealing (it’s more common than you’d think).

    My wife consistently meets goals, but that hasn’t prevented managers from threatening firing. They must have a quota of threats to fill. It definitely screws with morale.

  • 5 g4m3th30ry // Aug 8, 2009 at 12:21 am

    Incentives work so long as you’re incenting the right thing and that thing is important with or without the incentive.

    Most successful people are naturally competitive and depending upon the job, incentives can help drive this even if the award isn’t that big of a deal in the long run. Winning is sometimes good, even if the award isn’t.

    But either way, all humans run on incentives. Most of those “incentives” are actually internal, whereby someone rationalizes certain behavior as being good based upon their belief about themselves.

    For instance, someone who sees them self as John Wayne, would rather be fired from pizza delivery than give up money to some guy with a knife.

    This is demonstrated in game theory, recent economic research, and basic intuition.

    Though Voltaire did say, Common sense isn’t all that common…

  • 6 Dean Larson // Aug 8, 2009 at 10:22 am

    All great and correct points. For an outstanding study of failed incentives read “Punished By Rewards” by Alfie Kohn.

  • 7 Dan L // Aug 10, 2009 at 1:53 pm

    “Even during a recession, the threat of getting fired is really not a great incentivizing force. At best, it gets people to put in exactly the minimum effort to not get fired…”

    Totally disagree. It is true that in good times you only have to meet minimum standards (or less) to keep your job, but when things get rough, performance definitely has a lot to do with who gets fired. It’s not the only factor, but since it’s the one thing you can control that might help you keep your job, you bet your ass people are working harder in this economy (assuming they have enough work to do).

    “…and it’s surprisingly hard to actually fire someone for cause in most companies.”

    Really? Do you live in France or something? Or do you only know academics, civil servants, and unionized workers? Because I would wager that most Americans work at-will and can be fired for cause fairly easily. Just ask your friends from Wall Street how difficult it was to be let go.

  • 8 Rev. Pfloyd // Aug 10, 2009 at 6:38 pm

    I live in Omaha which is in an “at-will” state. We fire swiftly and without mercy!

  • 9 colson // Aug 13, 2009 at 12:58 am

    I like this post although I’m almost afraid of what the preferred answer would be – a consultant? ;)

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