Better Thinking: The Case Against Targets, Rewards, Incentives, Performance Appraisals and Ranking Workers
Posted: 10/12/2009 4:21:00 PM EDT | 16
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This isn’t really one topic, but several. Here we go, the demons of all demons . . . targets, rewards, incentives, performance appraisals and ranking workers. One thing I’ve discovered over the years is some people will fall into one of these categories:
- Calm down, Tripp. What’s the big deal?
- I am with you on this/these (fill in the blank), but not this this/these (fill in the blank).
- You are truly demented and insane.
Targets, Rewards and Incentives
Let’s start with a fundamental understanding of variation. This is important because variation was what W. Edwards Deming used to teach the Japanese how to manufacture products better. Quick count: GM and Chrysler—bankrupt. I rest my case. He did this with a country that had more earthquakes than resources. In Deming’s words (paraphrased), “the height of American industry was achieved from 1950-1968, we have been in decline ever since. We had no competition after WWII, anything we made could be sold.” The decline continues to date. So what is it that Dr. Deming understood that management does not? (Click on diagram to enlarge.)
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Figure 1
The above chart reflects a control chart first created by Walter Shewhart in 1932 at the Hawthorne Plant in Chicago where Dr. Deming worked. I won’t spend time going through the significance and how to calculate, but for those who want to learn more, visit http://blog.newsystemsthinking.com/blog/bryce-harrison/0/0/service-metrics-what-you-need-to-understand, for starters.
I got this data from a call center on the number of calls a call center representative averages. This individual averages about 100 (99.9) calls during the time period the data was collected and can expect between 44 and 155 (155.7 on chart) on a daily basis. The data are predictable—this person will continue to perform this way into the future unless the system changes.
What does this mean? This means that no matter what target you put into place, incentive, reward, appraisal or ranking you give this person they will predictably perform at this level (between 44 and 155 calls) unless the systems changes or they find a way to cheat the system. And let me tell you, if you have a reward or incentive out there and/or my living depend on it; I can be very creative in manipulating the system. I have seen call center folks hang up on customers to meet their AHT (average handle time) target to either get a reward or not be paid attention to by a supervisor. Some will say that is why we have inspection and/or monitoring . . . and I say you just increased your costs with un-needed work (monitoring/inspection). Worse, targets become the defacto purpose of the worker or manager instead of serving the customer purpose they are focused on the target, reward and/or incentive.
The 95/5 rule. Not really a rule, but what Dr. Deming discovered is that 95 percent of the performance of any organization is dependent upon the system (structure, work design, IT, procedures, roles, management thinking, etc.) and only 5 percent is attributable to the individual. So why is everyone spending time on the 5 percent with targets, rewards and incentives? We are working on the wrong problem and we are paying a tremendous cost in the process for inability to synthesize a system that creates a valuable product or service for the customer. This discounts that improvement is based on the individual.
But the managers have financial goals/targets? Same scenario; the results are dependent on the 95 percent. Further, I have seen more creative accounting in my lifetime than I care to disclose. Questions like, How can we book the revenue early? or declare a larger percentage of completion to get paid or bill the customer? Can we ship this before the end of the month? This is all waste to the organization; it adds no value. Yet, I see it in almost every organization I have worked with across many industries.
Performance Appraisals
What about appraisals of performance? “People need feedback” is a common rebuttal I receive. No problem, give them feedback . . . as really the issue is the scoring that goes along with it. Why do I have to be above average, average or below average? Raise your hand if you are below average? This is a question I ask in my seminars to managers. I don’t get too many takers at the average and below average stage; everyone believes they are above average. Scoring someone into categories like these can only demoralize the recipient of such a score.
Our organization needs performance appraisals to determine raises. More time is wasted in organizations determining who gets a 1 percent increase and who gets a 5 percent increase. In some cases witnessed, the costs in determination have exceeded the increase. There is a great deal of gnashing of teeth in the after effects of who got the best raises and the subjective nature of them usually makes the organization seem like a popularity contest than a business.
Our performance appraisals are objective. I once contracted with a Fortune 500 company that gave a performance appraisal that was “objective.” There were 150+ items to score that each manager had to complete for all employees and this took several weeks. The system was eventually scraped (divine intervention). There is no such thing as objective appraisal of performance. It is subjective.
What should I use to replace performance appraisals? Nothing, just like if you quit smoking. You don’t need to put something else in your mouth that is bad for you.
Attorneys require appraisals if we fire someone. I have heard the reverse is true. Attorneys have told me that the subjective nature of performance appraisals calls more things into question in the court of law than if you are undocumented. (Click on diagram to enlarge.)
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Figure 2
Ranking
The above diagram reflects the attitude towards forced ranking of many organizations. Let’s reward the high performers and fire the low performers. There are many problems with this thinking not to exclude the items we have already discussed. The problem with getting rid of the low performers is that there will always be people at the top and bottom of any organization. Your organization hired and trained all types, at great expense I might add, and there is no guarantee that when you hire someone to replace a low performer they will be better than one you just got rid of from the organization. (Click on diagram to enlarge.)
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Figure 3
I have a better solution. Rather than rewarding the performance of the high performers, why don’t we improve the performance of all people in the organization. It would take a huge improvement of the high performers to out perform a small improvement of all levels of performers (See figure three). This reflects a better way of thinking to improve performance.
More on a Better Way
Targets, rewards, incentives, performance appraisals and ranking are not going to drive profit into your organization. These approaches drive profit out of the organization by all the time and technology invested. And let’s not forget about the frustrated employees and wake of destruction these promote.
It was Frederick Herzberg that said, “If you want people to do a better job, give them a better job to do.” The real issue that needs to be addressed is the poor design and management of work we have in our organizations. This will require new thinking in our approach.
If or when people learn these approaches are wrong, you may want to start by understanding your organization as a system. This is not a tools-based approach like TQM, Lean or Six Sigma as these approaches do little to change the thinking around the design and management of work. This is a thinking-based approach that requires the minds of all people in the system.
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Contributor: Tripp Babbitt |
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Judge:
The problem with evaluating performance is that it is never individual, they are always part of the broader system. They can not be separated. In fact, most (95%) of performance is based on the system/individual interaction and only 5% to the individual alone. Even well-defined metrics miss this important piece.
Sorry, but it is waste to have to build a system that relies on "catching" people cheating the system. |
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Sales environments are pretty objective versus subjective. Sure you can cheat but those folks are easily caught with modern call center technology. At the end of a day, week, month or year its pretty easy to evaluate performance when the metrics are well defined. -Judge- |
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Derek: You may some good points here. I just see a bigger lever for improvement which is the design and management of work. The work design is poor, boring, etc. Before I start to worry about recognizing people I like to give them challenging and exciting work that leads to innovation. Plus if I am going to make workers accountable I can't be dictating every step to them in command and control fashion, they check their brains at the door. You have taken the fun out of work and work can and should be fun. We just need different thinking to achieve that end. The system (all workers) are dying for a better system to work in. This should precede and possibly could replace recognition. If I love my job and the work is interesting that can be a form of recognition. But please leave out the carrots and the sticks.
Regards, Tripp
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Excellent post. Recognition, however, given after the fact and with no motive other than to sincerely appreciate effort given -- that is a powerful tool for feedback. Unfortunately, as you note, it so often limited to the top 10 percent. Such an egalitarian approach will never effect positive change of any kind across the entire company. That's why we so strongly advocate "Opportunity for All" to participate in strategic recognition. The research supports this -- even Jack Welch.
• “Invest in the core. The key to driving productivity gains is increasing engagement among core contributors, who represent 60 percent of the typical workforce. Highly engaged employees are already working at or near their peak but are often limited by their less engaged co-workers. Focusing on engaging core contributors can improve both groups' productivity.” – Watson Wyatt Worldwide, 2008/2009 WorkUSA Report
• “The middle 70 percent are managed differently. This group of people is enormously valuable to any company; you simply cannot function without their skills, energy, and commitment. After all, they are the majority of your employees. But everyone in the middle 70 needs to be motivated, and made to feel as if they truly belong. You do not want to lose the vast majority of your middle 70 – you want to improve them.” – Jack Welch, Winning
(links to cited research available here: http://globoforce.blogspot.com/2009/04/employee-recognition-who-do-you-involve.html)
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amyhr: Can we reward the system and not the individual. 5%, 6, 7% to everyone? Otherwise, let's reward them with a better system to work in. PeWorkers understanding customer purpose and deriving customer measures from purpose can be liberated to change method and innovate. The right to enjoy your work is a reward.
Regards, Tripp |
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i2i - some great comments, but misguided (my opinion only). The problem with our organizations is that the design and management of work is at issue. If I give a person a well-designed system to work in they can perform better. My point is that most systems are horrific. We need to improve the work before blaming the worker. It offers a larger lever for improvement. When common cause variation is the problem and we treat as special we sub-optimize or tamper with our system. The key with common cause variation is the system dicatates the performance, not the individual alone. Additional training for some one that reaches statistical control is the wrong. Think about it. Rewards cause nothing but sub-optimization. If I improve sales and sell things that we can't make or do and cut the price for my commision I help neither the company or the customer. Targets and rewards become the defcto purpose and the customer doesn't get what they need which results in failure demand from customers (demand caused by a failure to do something or do something right for the customer). I especially would like you to download the free manual "Understanding Your Organization as a System" and if you send me your address I'll send you a book called "freedom from Command and Control". I think you would see things differently with a new perspective.
Regards, Tripp@newsystemsthinking.com |
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CndyVentrice: How do you objectivly differentiate the high performers from the low performers? You can't typically, as this is subjective. If I have a contrarian idea that my boss won't support, will I share it? Or will I fear reprisal? What does this do for innovation? I went to your survey. I am not sure if this was an analytical or ennumerative survey, so I don't know how valid the information is. Regardless, I didn't say there shouldn't be any recognition, just that the system offers a bigger lever for improvement.
Regards, Tripp |
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My aim here is to stir thinking and debate. To keep things clear I will post different posts in response working from JT on down. All may enjoy the free download from my website "Understanding Your Organization as a System."
JTcowman: You are accurate about a statistical outlier, however, in the data above (in my article) there is no outlier so your argument falls apart there. If I did represent a special cause (outside the limits) you would be accurate. The problem with this is that I usually find (in service) manipulation of data when I find a worker that is an outlier to achieve some target or incentive (something Dr. Deming was against pg 72). Someone rewarded for being better may not share method if they are a true special cause. Secondly, there is no intent to take the human element out. Contrary, we make the individual more relevant by giving them a better design for work making the job more interesting and cooperative. They participate in decision-making instead of being held accountable for work they have no say in. Also, if I go to Home Depot please provide me a list of the high performers (or at least something to differentiate them from the others) so I don't have to waste my time with the miserable average and low-performers.
Regards, Tripp |
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Mr Babbitt,
As I was reading your article, I couldn't resist the feeling that much of what you were representing as Edwards Deming's work wasn't ringing true. As I was browsing through my copy of "Out of the Crisis" by W Edwards Deming to check my feelings against fact, I ran across this statement by Dr Deming. On page 275 Dr. Deming says, "...if the top man is a special cause on the side of low proportion defective, then he is indeed outstanding. He would deserve recognition, and could be a focal point for teaching men how to do the job." This sounds like recognition to me.
I agree with you that today's system of management is in shambles. It hasn't changed significantly in 200 years. But the answer is not to take the human element out of management, but to use an organization's human resources to make it the best. To do that, you have to manage humans, not processes. Dr. Deming did not promote using statistics to manage a company, but said that statistics are a valuable tool for managing a company. There is a difference.
If you truly believe that rewards, incentives, and performance appraisals (feedback) "drive performance out of the organization", I would request that you please supply a list of your clients, because I want to make sure that I never work for one of these companies. |
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Its an interesting, contrarian, thought-provoking perspective ! |
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Hmmm... a couple of thoughts here. 1) On performance appraisal - in my experience those companies that do not differentiate between poor performance and high performance find their high performers burned out and demotivated by the unfairness of it all. 2) Indeviduals want to be recognized. Regardless of the culture, individuals want to be acknowledged. A survey I completed in 2007 found 85% of employees find individual recognition most meaninful (http://www.maketheirday.com/recognition_survey1.htm) This same survey did find that the most meaningful recognition is rarely accompanied by a significant financial reward. Cindy Ventrice, author of Make Their Day! Employee Recognition That Works |
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Great information and graphs especially. Often people are trapped into the performance appraisal cycle, only performing enough to get a good score. But you have to wonder if that employee can offer more to an organization than what's being charted by paper. Also, unfortunately the employee is limited by the likes or dislikes of his/her immediate boss.
I'm not 100% anti performance appraisals, but they shouldn't be the only means of monitoring performance and contributions to the organization.
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Tripp - great take on the issue of Incentive, Appraisals and Rankings. However, there is a lot of space between some of the arguments.
First of all - I really liked how you wove the issue of variability into the discussion of rewards. However, your comment "The data are predictable—this person will continue to perform this way into the future unless the system changes" assumes the only cause of variability is the system. We all know that humans are inherently variable.
The real point is to reduce variability. System changes is one way. Human changes is the other. Two things that could be addressed and rewards used to help.
One - an incentive targeting a goal at a lower level than the boundary of the upper limit would potentially create a new "lower limit" thereby compressing the span. It is human nature that whenever you set a lower limit - that becomes the defacto standard of performance. By not addressing motivation as one of the causes of the variance communicates that it is "OKAY" to be at the lower limit - thereby reinforcing poor performance.
But an even better discussion should be around root causes of the variability. If the system is the cause then that should be addressed. However, to flatly state that the system is the cause is just wrong. Providing additional training - and rewards for taking that training is one way to address the issue if training is identified as a cause. I do agree that just setting goals without understanding the causes is a problem - one that many managers do make. But that's a function of poor design - not reward programs in general.
Also, as systems get more fine-tuned - the only area to look to for improvement is in the people. Your post would seem to indicate that people are irrelevant to the performance of a company and all managers should plan the "process" and not the people. I think people are becoming more important as systems become standardized and "best practiced" to death.
As far as forced rankings - I agree that there is no guarantee that the next round of folks you bring in will perform better than the group you booted. However, forced rankings do communicate that performance is valued and we won't tolerate poor performers. Even if nothing is done with the data - going through a forced ranking exercise makes managers evaluate needs and capabilities leading to (hopefully) better hires as attrition occurs.
Improving the performance of the middle 60% (or whatever majority number you want to use) is the best way to get better results. That is the group with the most potential for growth. Just ask any top performing sales person given the same growth goal as a lower level schlub how difficult it is to ramp up their already high level of performance. However, rewarding top performers is a good way to reinforce the performance culture of an organization - they need to know their effort isn't going unnoticed especially as management and resources are focused on those performing at a lower level.
I think we're in agreement on the performance appraisal gig - I'd only add that ongoing level-setting with employees is critical to maintain performance standards. The once-a-year appraisal needs to be replaced by the once-a-day appraisal.
Thanks for the post. |
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Brilliant article Tripp! Really gets to the heart of the problems experienced by workers in service companies. |
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I like this thinking and the logic behind it. People and their relationships with each other and the work they do is what makes organizations successful -- but how does one 'sell' this concept to a management team hell-bent on "Pay for Performance" and anything they deem 'socialistic?' |
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Interesting article, Tripp. Your arguments make sense, but the question I'm still left with is: "How do you reward staff?" Changing the system definately changes the profitability - but again - how do you REWARD? |
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