The Puget Sound area is enjoying an economic boom. The downside for most employers is finding and retaining good employees. Perhaps this is why I have had so many questions from clients recently about designing Incentive Compensation Plans.
Usually my clients propose a complex plan with many factors contributing to the incentive compensation. Often the approach is a matrix with a number of subjective factors. In my view, this is ineffective at incentivizing people.
I use a few guidelines to help in designing an Incentive Compensation Plan:
Alignment—The employee’s motivation needs to be aligned with what the company wishes to achieve.
Motivation—The plan must actually motivate the employee.
Objectivity—The factors in calculating the incentive compensation should be objectively measurable.
Controllable—The person being (hopefully) motivated must be able to control the factors that lead to their bonus.
Simplicity—If the plan is overly complex, the employee will be confused and demotivated.
More than any other resource on this topic, I suggest to clients to review the concepts of Daniel Pink’s book, Drive, the Surprising Trust about what Motivates Us. Pink’s assertion is that science has been discovering that humans are not motivated in the ways we thought. And the problem is business has not caught up with what the science shows.
Below I give you a short synopsis of “Drive” and I urge you to read the whole book. But if you’re not a reader, or you’re just too busy, take ten minutes to look at the RSA Animate video on “Drive” on YouTube. Just search for “RSA Animate Drive” or “Daniel Pink” or some combination. In ten minutes you’ll get an entertaining overview of the book in the engaging manner of all the RSA Animate videos.
The Book Review
Social scientists have been showing over the last 50 or more years that we are not the rational, profit-maximizing creatures we were told we were in our economics classes. In fact, we make lots of irrational choices and behave in ways that traditional economic theory cannot explain.
Daniel Pink calls our first human operating system, Motivation 1.0, a system for survival. Think Maslow’s hierarchy of needs. Once we got past the survival phase, Motivation 2.0 was the system that governed. It was built around external rewards and punishments. Pink’s argument is that Motivation 2.0 is now outdated. It is poorly suited to the way we organize what we do, how we think about what we do, and how we do what we do. He suggests an upgrade.
Actually, Motivation 2.0 still works for mechanical tasks that are simple and straightforward, tasks that don’t require creativity. In this case, if we reward (pay more) for more output, it works. But as soon as a task becomes more complicated, as soon as it requires cognitive skills and creativity, Motivation 2.0 actually reduces output. One might think this makes no sense; it defies the laws of behavior. But Motivation 2.0 takes a task and makes it drudgery, it creates a disincentive.
Pink says the research shows that money is a problem if you don’t pay enough, so that an employee is under pressure. But once a person is paid enough that money isn’t an issue, so they are not thinking about money all the time, then monetary incentives don’t work.
What does work for motivating employees where thinking and creativity are required? Three things. The first is Autonomy, the desire to be self-directed. The focus of management in Motivation 2.0, external reward, will result in compliance but not engagement. Allowing and encouraging self-direction will result in engagement.
The second factor is Mastery. We like to get better at things because it is satisfying. The third motivating factor in Motivation 3.0 is Purpose. Pink says we are really “purpose maximizers” rather than “profit maximizers.” We want to be part of something noble and something bigger than ourselves.
Pink’s argument is that by fostering a workplace where employees can pursue autonomy, mastery and purpose, a company will create a more creative, productive and profitable company.
One Final Thought
A wise man once said, “Real wealth isn’t money, real wealth is discretionary time.” Maybe your valued employees would be more motivated by more vacation time than an incentive compensation plan.
No comments yet.