Incentive Systems Won’t Substitute For Good Management

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Aug 16, 2019

For two decades I designed compensation and performance management systems for large and medium companies. I always had this nagging thought that after two or three years the system had run its course. Those who wanted to do so had figured out the game and turned what was intended to be a fair system into their own playground.

Quantitative performance ratings drove me crazy. Leaders would figure out the overall rating they wanted, and then go back and tweak the individual ratings so that they could give the salary increase they wanted to give.

Several months ago, The Wall Street Journal carried an article about how companies are learning to game Glassdoor. Companies like SpaceX, SAP, LinkedIn and Anthem “encouraged” people to leave excellent reviews, causing unusual spikes in their ratings. CEOs questioned about the practice said that ratings on the site were not representative of their company, so they “fixed” it.

I see a pattern here – those systems that are intended to provide helpful and unbiased data can be “gamed.”

The other nagging thought I had back when I designed compensation plans was that plan sponsors wanted to substitute a system for daily leadership. How do we make sure the tellers are upselling? Put in an incentive plan. Are tellers balancing? Put it in the incentive plan. Are they being nice…? You’ve got the idea. The plan becomes so complicated that two staff analysts are engaged to “track and manage” it. The branch manager doesn’t understand it and spends more time explaining the plan than correcting behaviors.

No substitute for leadership

I see another pattern here – there seems to be more value placed on systems to manage behavior than on leadership observation, coaching, and feedback.

Systems are critical in an organization. They lay boundaries, communicate values, encourage appropriate behavior while discouraging behavior that is contrary to the mission. They are not, however, a substitute for leadership. The timely and effective use of organizational systems should be a competency for which leaders are held accountable.

How can an organization build accountability into their systems so that the data and results are intentional and not “gamed?” Here are four ways to get started.

1. Understand the “why”

Systems have a purpose; otherwise, they are a waste of time. A leadership team must clearly understand the purpose of the system and the rules that are put in place to shape organizational behavior. Moreover, the purpose must be to improve or grow the business. Any other purpose is not sufficiently compelling.

Before introducing a system, the purpose, expectations, and outcomes must be clearly defined and agreed to by all who will exercise leadership decision-making.

Let’s take performance management as an example. There are many possible purposes of performance management, from equal and fair pay, to control of personnel expense, to an investment in the growth and development of the workforce. Each reason needs a clear business reason and projected financial impact. After all, every hour spent on the system costs money and should provide a return.

2. Be clear about the required leadership behavior

Leaders should be accountable for the integrity of any organizational system; they must ensure that the system is living up to its stated purpose. For that to happen, they must understand their role as leaders. Continuing with performance management, a leader’s role is to be fair, attract and develop talent and manage the financial viability of their unit.

Sometimes these roles conflict. It may seem as if financial controls or personnel expense conflict with “attracting and retaining the best,” but it is no secret that compensation is not a means of engaging employees, although it is a dissatisfier if not perceived as fair.

If the purpose of a system is both control of personnel expense and growth and development of employees, leadership behaviors are crucial. To achieve growth and development, leaders must take an active role in setting expectations, teaching and coaching, and holding their teams accountable. If the leaders are not accountable for shaping behaviors, how can you expect the system to serve its purpose?

3. Measure the integrity of the system regularly

Leaders generally intend to want to lead effectively, but sometimes busy-ness or personal discomfort keep them from carrying out important systemic roles. It is human nature to procrastinate doing things we don’t like to do; coaching and feedback too often fall into that category.

The adage, “inspect what you expect” has merit; when I know I’m being observed in the behaviors I exhibit (like coaching and feedback) I will be more likely to move outside my comfort zone.

Measurement can’t be only quantitative. Numbers only tell part of the story. What do other measurement tools say? If the purpose of the system is to develop and grow the workforce, does the annual employee survey say that the employees feel as if they are developing and growing? Like performance management, an employee survey is an organizational system that should have a clear purpose; otherwise, why ask the questions. If the purpose is to check the engagement and commitment levels of employees, that is helpful data.

4. Call it like it is

Sometimes systems are implemented without a clear purpose and evolve processes that are administratively burdensome and unhelpful. If systems aren’t producing expected results, that is time to go back to basics, define the purpose and leadership behaviors, and create a system that will achieve the desired results.

Systems, without effective leadership, may or may not achieve desired results

Strong leadership required

During the time I designed pay and performance programs, generally plan sponsors had moved on to other things that required their attention, and never went back to see if behaviors had changed. Sure, they looked at the financial goals, but rarely did they look beyond to ask why a goal was or wasn’t met. Typically, they just tweaked the system.

Regarding Glassdoor and other open rating systems, technology has opened the door for everyone to have a voice, and it is doubtful that voice will be silenced. However, if organizations pay close attention to the purpose of the systems that they have in place, hold leaders accountable for their behavior, and consistently measure the quantitative and qualitative results that the system yields, they may not have to game Glassdoor’s ratings. They may just find themselves doing what they said they wanted to do.