Misguided Incentives Steal the Show

This week we’ve learned of the Atlanta school system’s multi-teacher, multi-administrator, multi-school conspiracy to cheat in order to win funds for the school and for teacher bonuses.

The dangerously short and direct tie from individual rewards to ratings data is evident in a statement published in this March 29 article by Huffington Post writer, Kate Brumback: “The tests were the key measure the state used to determine whether it met the federal No Child Left Behind law. Schools with good test scores get extra federal dollars to spend in the classroom or on teacher bonuses.”

Beyond revealing the school system’s lack of ethics, and a willingness to leapfrog over other more statistically-worthy and improvement-focused school systems, this story reveals a consistent and growing pattern in our free market today: Organizations increasingly rely upon over-simplified reward programs that 1) intend to drive outcomes, 2) overlook realities of human behaviors and 3) distance would-be accountable leadership from the performance of individuals.

Result: Outcomes are achieved, but not the ones the organization originally sought. The organization assumed that in pursuit of fair rewards, individuals would disregard shortcuts and diligently work to improve organically. But individual monetary rewards are too valuable to the average worker or teacher. If only one loophole exists, employees feel too compelled, and sometimes justified, to use it.

To the individual, incentives are everything. Up until a few years ago, wealthy Greek homeowners intentionally maintained shabby, dilapidated-appearing home facades though indoors the home may have been palatial. Why? Incentives; Greek property taxes were based on a value assessment conducted from the street. As the Greek government begins to leverage newer higher-tech practices, like using Google Earth to view an entire property from above, some homeowners are installing pool camouflage to hide the apparent value of their homes.

Homes in Charleston, South Carolina, are uncomfortably narrow—the width of one small room—but extremely long, many times the width. Why? Incentives; the original property taxes were based on a linear measurement of the house’s street-front property, not the overall value or square footage. Is it likely that anyone voluntarily chose to build his or her house obscenely narrow and long? No. Homeowners of the day saw potential for financial gain in mangling their home’s layout, and leaped on the opportunity.

Financial incentives can drive almost any behavior. If we were to legislate tax discounts for all homes built in the shape of a pineapple, preposterous as it may seem, you’d soon see a boom in appreciation for neo-Spongebobian architecture and many cookie-cutter neighborhoods boasting pineapple after pineapple after pineapple abode.

Individual behaviors align directly with incentives and rewards. This reality is at once powerful and dangerous. Unwittingly legislating tax loopholes may inadvertently reward people who essentially cheat. Compensating employees based on subjective manager perceptions could encourage employees to game the system by focusing on schmoozing and could discourage employees when it comes to putting in good old fashioned hard work. Offering cash bonuses to the highest-performing schools and the teachers within them could become an incentive to drive scores upward using any lever available, ethical or not. Teachers could have good intentions, with plans to use the funds gained to better the school. But the Machiavellian means-to-an-end method leapfrogs the internal organic improvement that the incentive was designed to reward. Organizations must take care in how they define incentives.

Human Incentive #1: Money

To give humans the benefit of the doubt, let’s presume that all people aspire to achieve the highest level of self-actualization in their life’s pursuits and that people are neither purely selfish nor all greed.

Despite that premise, it’s undeniable that monetary incentives get our attention. Whether you want it to buy a car, or to fund an orphanage, or to hike Mount Everest, money is a fast track toward achieving most goals. As anti-intuitive as it may seem, even billionaires are driven to work night and day to get more of it.

Mexican drug cartels are monitored and fought aggressively by U.S. police and military forces, but because big dollars are the carrot, cartels have the incentive to make equally big investments to achieve the rewards. Cartels invest multi-millions of dollars in research and development programs, devising complicated methods of distributing drugs, from underwater torpedo programs, to skydiving missions, to fleets of unmanned planes. If there was no money to be made on drugs, cartels would be nothing but a collection of lazy men napping under a tree. But with the right incentives, they are transformed into an organized, focused, innovative, aligned network of drug-delivering experts. Ironically, it’s a perfect illustration of how incentive programs can drive organizational performance and align all players around a single mission.

Linking Rewards to Performance

Businesses understand that employee behaviors can be impacted by offering monetary rewards such as bonuses or better-than-average pay increases. But those rewards need to be linked to behaviors that drive success, and those behaviors need to be measurable. How can the company know for sure what individual behaviors drive success? And how can they be measured on an individual or team basis?

Enter the customer feedback survey. Our free market has given birth to some wild things. One of those is the customer feedback survey, a tool designed to enable businesses to understand customer preferences and, in response, modify products or services. Survey data helps companies steer their ships more competitively, answering questions like: “Where should we invest more?” “What product lines should we drop?” What issues are critical to resolve?”

In addition, because surveys provide such a clear, crisp, cache of data, some businesses see it as a simple solution to the challenging task of measuring employee performance. Customer feedback surveys offer an indisputable metric that is seen as objective and outcomes-based. In the end, if the customer is satisfied and wants to come back again, the worker succeeded, period.

Having such a clear method of linking customer satisfaction to employee compensation is vital to the company because customer satisfaction leads to loyalty, and loyalty is big money, the Holy Grail.

Loyalty affords the company a long, predictable sales pipeline, attractive on Wall Street. And it enables the company to fatten margins; when a customer prefers one brand, he or she is more likely to skip the rational ‘price comparison’ step and move directly to purchasing.

So businesses tie a rope on part of the employee’s compensation, and anchor it to the customer feedback results.

Danger in Tying Vital Individual Compensation to Performance

When surveys become the primary metric for rewarding employees, customers are placed in an uncomfortable position. If their service was not perfect, they are asked to either punish the service rep, or lie to the company.

There is no marketing or PR cleanup that can undo the messy feelings the customer has when, under the Fawlty Towers Method of Management, the company publicly flogs employees in the head with a codfish when something goes wrong.

Similarly, public school teachers, whose bonuses rely on student test scores, may get an equally public and painful punch in the gut if, after years of dedicated work, student test scores remain low.

While the intentions of governments and business are good, their execution is faulty. By tying a vital resource—money—directly to customer feedback or student performance, employers may make it too risky for employees to try something new. Employees may feel afraid to experiment with a new process for fear of not achieving the metrical outcomes within the set review period. An employee may feel powerless to resolve a team issue because he must rather focus on protecting his own individual metrics. Teachers may then feel desperate, and compelled to fix test scores. And employees may feel compelled to turn to the customer and request an artificially-positive score. Who could it hurt?

Well, if taken to extremes, employees could begin making blatant deals with customers, promising large discounts or free services in exchange for high ratings. The customer would benefit, the employee would benefit, but the company would suffer financially. This scenario exposes potential pitfalls of such a binary program. “If rating is good, then bonus compensation is granted.” For businesses, governments and school system, this type of program unfolds as less of an improvement method and more of an individual meal ticket. It’s all about the incentives. Embedded somewhere in every human being’s mind is the question: What behaviors will pay out?

So what can organizations do?

How can we ensure the people we employ are committed to drive success? Any organization seeks to affect the greatest possible return from its human capital investment. Expert organizations, like the Society for Human Resource Management, continually knead this topic as it evolves in parallel to an ever-changing economy.

But there are some steady and intuitive principles that organizations can apply in any economy:

  • Offer carrots that align with the values of the type of person it seeks to recruit or reward. Offering only monetary incentives wins the attention of those who value money. To win the attention of people who value excellence and improvement, design rewards that include recognition for excellence, career growth, and the opportunity to teach and lead others.
  • Enable employees to focus on improvement and on taking good risks. All-or-none rewards can result in paralysis. Employees can be recognized for analyzing and improving processes.
  • Make leaders visible, accountable participants in improvement programs. Develop and promote service-oriented leaders who are natural coaches and who demonstrate a passion for improvement through people development.
  • Be clear and transparent in direction-setting language and communications. Define and share a vision, mission and current strategy that connects to real business drivers, and link every employee’s goals to those top priorities. Leaders don’t need to hide their goals for financial gain, and organizational growth and success. They should respectfully communicate how those goals translate into greater opportunity for all employees; organizational success in turn gives each employee greater opportunities for reward, for career advancement, and for gaining experience in a successful, growing company.
  • Conduct 360 leadership reviews internally to enable leaders to continually sharpen their pencils along with employees.

See examples of actual requests for a customer to lie on a feedback survey in Part II of Incentives Gone Wild