Incentive Pay Isn't Good for Your Company
If all you're interested in achieving are short-term goals, a bonus plan might help you reach them. But that same plan can undercut every long-term goal you have
At a recent Inc. conference I was asked what role incentive pay had played in the recent turnaround in quality at Lantech, the company I cofounded 22 years ago. "None," I said. "I don't believe performance bonuses give people a sense of ownership in their work. I think the effect is just the opposite."
Frankly, until that moment I hadn't known how passionately I disliked incentive-based pay. As I thought more about it I realized that over the years I had come to two uncommon conclusions about monetary incentives. The first is that such incentives don't work in the long-term interest of the company. They can put a damper on some really important overall goals, such as customer satisfaction, teamwork, company flexibility, product quality, and people's focus on the company's vision. The second conclusion is this: my guess is that, outside the sales field (which attracts people who are motivated by incentive pay), the percentage of people who find bonuses an incentive to change their day-to-day behavior is less than 10%. That's a small number of people, but it's also a vocal number. They are found more often among entrepreneurs and chief executives -- the very people who put incentive plans in place to optimize performance -- than in the population at large.
Those contrarian ideas of mine didn't come from a book or from a consultant. They're directly related to my experience with incentive pay, which started even before we founded Lantech. I myself am among the 10% of people who are influenced by bonus plans. If you give me an incentive plan, I'll change my behavior to meet it. In the late 1960s and early 1970s, for instance, I was a salesman for a couple of monoliths -- the packaging division of Mobil Oil, for one. I prioritized what I did for the customer and what I did for the company by how it affected my pay. Since no manager or consultant is smart enough to foresee everything when setting up an incentive plan, I sometimes did things that were great for my commission but not so good for customer satisfaction or the company's long-term goals.
From the beginning at Lantech, my brother and I wanted to do it differently. We had witnessed and experienced companies' frequent compromise of human needs and values to reach commercial success. Shortly after our invention and introduction of pallet stretch wrapping in the early '70s, fast growth was about to swamp us. Customer demand forced us into several years of 200% to 300% growth. We needed productivity and teamwork, and we needed it fast.
Empowerment wasn't a common term then -- this was in the mid '70s -- but that's what we were after. The idea was, Let's allow employees full participation in the management of the shop, which probably had up to 20 people by then. Let's let them, first of all, elect their own leaders, their own foremen, since nobody knows good leaders better than the people to be led. And then let's allocate a bonus pool to them (including the elected foremen) to share, a substantial bonus pool. It was a big hunk of dollars, 30% of their pay.
The second part of the plan was that they would evaluate one another for bonuses according to a set of criteria we established. Once the experiment started, we had astronomical jumps in productivity for 60, 90, 120 days -- probably for as long as six months. After that, the combination of unenlightened leadership and stress over the evaluations began to kick in, and productivity began to drop. (Foremen who hadn't been in leadership positions before exhibited the "sergeant's phenomenon" -- at first they exercised their authority in a pretty wild way, without regard for the welfare and security of the rest of the people. After each round of elections, those newly elected would go through the same pattern.) As for the stress of the bonus evaluations, there seems to be a significant portion of the population that pretty much hates the idea of being evaluated and evaluating. It is stressful. A lot of people had never been part of such a process before, and even the ones who had been found it difficult. The combination of the poor leadership style and the stresses and strains of the bonus evaluations produced a level of insecurity and discomfort that had people looking over their shoulders all the time. The sense was that coworkers were spies instead of compatriots. The bonus system had created a divisiveness that wasn't there before.
That plan lasted only a year and a half, which, within a 22-year period, is not a long experiment. But the reason it was so significant to me is that it was a noble, philosophically sound approach with early success but with some unpredicted and undesirable consequences.
At another time, I tried to motivate the four or five managers then reporting to me by reorganizing their divisions into independent profit centers. I experimented with various types of incentive pay: a percentage of the profits, combined with concrete incentives tied to concrete, measurable improvements, such as in sales growth. To my chagrin, that limited the company's flexibility. I often had to say -- whether I was talking to one of the 10% or to a nonbeliever -- "Well, I understand this isn't going to help out your bonus, but this is something we need to do, so you do it and I'll take care of the bonus thing." First thing I knew, the bonus plan was undermined by those kinds of activities. The bonuses also moved managers in the direction of favoring short-term profit over long-term customer satisfaction. They were so busy fighting over who was going to pay for what that they couldn't make decisions that were good for the customers or the company as a whole.
I also once tried to use objective criteria. For instance, we established a certain call-per-day rate for the sales force. In general, the criteria were things that don't of and by themselves generate sales or profit but were believed to be stepping stones. And they were measurable. The results were pretty unsatisfactory. Call reports, for example, are often trumped up or at least inflated. Those who didn't abuse the system believed that the people who got paid a lot did abuse it. So we made cynics of everybody.
There's also a more subtle, philosophical question of manipulation at work here. In short, many people resent being manipulated with the carrot and the stick. That particular sensitivity is more and more visible in people under 40. I have to say I feel it myself. It's like saying, "I think you will do your job right only if I pay you more money to do it." It builds a certain element of distrust or manipulation into the human relationships in the organization, which I think lowers the standards a little bit. Maybe not a lot, but it's there.
It may sound as if we were tinkering with our compensation every few months. Except for our experiment in democracy, each of our plans lasted for at least two to five years. The 10% population was resentful when we initiated a new plan, believing it was management's attempt to get out of its commitment from the prior plan. Most of those employees by then had figured out how to get the current plan to sing for them. The other 90% absolutely blessed the day that we got rid of one plan and then resented the new system if it contained individual financial incentives.
Please understand, it's not variable pay I object to -- there are many good reasons for variable pay. What I object to is the notion that you can or should get people to do what they otherwise wouldn't do by paying them more if they do it. In my experience, first of all, that doesn't work with the broad population but does produce resentment; and, second, the population that it does work with exhibits significant destructive behaviors you can't foresee.
As I look back, I realize I probably could have improved our various incentive plans in one way or another -- and we tried more than I've outlined here. But I could never have improved them enough. All in all, I am absolutely certain that the toxic impact of incentive pay outweighs its ability to motivate, except possibly in sales. In sales, it's probably a toss-up.
For the past several years at Lantech we have had a profit-sharing program that we consider to be a just, fair reward for work that has been done. Interestingly, it is the same plan we had when we thought profit sharing was an incentive. The difference is this: we no longer believe that people are going to maximize our profit just because we have a profit-sharing plan. Motivation comes from a positive culture or environment set in place by leadership. At Lantech, our associates feel empowered and involved in continually improving our customer satisfaction. No financial incentive could ever inspire the sorts of results that come from their positive sense of accomplishment and job satisfaction.* * *
Patrick R. Lancaster III is president and cofounder of Lantech, a $50-million, 300-employee manufacturer in Louisville.