The Problem With Reward Structures That Discourage Collaboration

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Jul 3, 2014

Second of two parts

Did you miss Part 1? See How Short-Term Financial Decisions Can Destroy Workforce Productivity

One of the classic articles about workforce managements is entitled, On the folly of rewarding A, while hoping for B.

The author provides multiple examples illustrating how leaders often communicate one thing to employees while rewarding entirely different behaviors.

This article was published almost 40 years ago, but its message is just as relevant today. The negative corporate behaviors associated with inter-departmental conflict, administrative bureaucracy, and short-term thinking can be traced directly back to the financial structures used to reward employees.

I doubt financial departments intentionally create reward structures to encourage corporate silos and inefficient administrative bureaucracies. But such outcomes are often the result of building reward structures without fully thinking about how they will play out further down in the organization.

Consider the following two relatively common types of sub-optimal financial reward structures:

1. Rewarding internal compliance over customer service

Financial reward structures are often designed by people who do not actually work with customers to generate revenue for the company. As a result, reward structures often over-emphasize outcomes important to internal support functions and under-emphasize outcomes associated with customer service.

For example, a large health care organization recently implemented a record system that made the insurance claims process much easier for the internal accounting department. However, it also significantly increased the time doctors must spend entering data.

When the system was rolled out, doctors were told that their bonuses depended on entering data into the system in less than 24 hours. This requirement led to doctors seeing fewer patients each day to ensure they have time to complete the data entry. The reward structure was more focused on increasing internal process compliance than encouraging doctors to provide better quality patient care.

I strongly suspect the finance people who created this reward structure spend far more time with the accounting personnel who process claims than with the doctors who actually generate the organization’s revenue.

2. Rewarding cost savings versus revenue generation

Many financial reward structures are set at the business unit level and then cascaded down in functional silos.

For example, an Administrative Support department might get a set of financial targets focused on reducing operating costs while the Sales department received targets tied to closing new business. These targets are then cascaded down within each department such that individual administrative support employees are solely rewarded for reducing costs, while individual sales people are solely rewarded for closing new deals. Yet these two employees are expected to collaborate out in the field.

I have seen many examples of administrative support functions severely damaging sales force performance as a result of overly restrictive travel and expense policies. And I’ve seen just as many examples of wastefully extravagant expenses racked up by sales people in the name of “closing deals.”

Rather than encouraging collaboration between sales and support to achieve maximum sales with minimum expense, reward structures often create hostility between these interdependent parts of the organization.

Support says “sales doesn’t care about costs,” and based on how sales is rewarded, they are right. On the other hand, sales people’s complaints about support not caring about closing deals are equally valid.

A focus on compliance, not productivity

One sales person memorably told me that “working with my travel support group is like getting a license from the Department of Motor Vehicles. They aren’t measured based on whether they help me be more productive, they just care about complying with their department’s internal policies.”

The lesson to be learned is if you truly want different departments to collaborate with each other, then you must create alignment and interdependencies between the financial reward structures used by each department.

The goal of this paper is not to demean or decrease the critical importance of Finance, but to create awareness to how certain financial practices can significantly damage workforce productivity.

For many years, HR departments have been justly criticized for not doing enough to understand the financial side of the business. But, the same can be said for many Finance organizations in their understanding of HR.

Financial targets vs. employing people

Decisions that make sense based on financial spreadsheets can seriously undermine business performance when they are rolled out to actual people. The partnership between HR and Finance extends both ways – we should seek to learn more about each other.

Or as I like to say, the main reason we employ people is to hit financial targets. But we won’t hit financial targets if we don’t effectively manage the people we employ.

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