Incentives Before the Fact?

I don't know about you, but I just love Peter Cappelli.   He is one of the "thought" leaders in HR.  You might not always agree with his ideas, but you have to admit that he is always willing to shake up conventional wisdom and bring creative ideas to the table for consideration.

I read one of his articles the other day entitled “Rethinking Incentives and Discipline” in HRE.  I thought I would share some of his thoughts with you.

What if managers were given their bonuses (at target) at the beginning of the year when goals are developed and then a portion, or all of it taken away at the end of the year if some or all of the goals were not met?  If they were met, the target bonus would be kept.   If goals were exceeded, managers would receive additional money up to the maximum allowed.   The equivalent of “claw backs” for executive and sales compensation.

He bases this idea off a study conducted at the Chicago public school system by a couple of university economics professors.  The study included 150 K-8 teachers from Chicago Heights, a low-income community in Illinois. One group agreed to work under a traditional year-end bonus structure, where they could make between zero to $8,000 based on their students' standardized test scores. Another group was given $4,000 at the beginning of the school  year  and informed that if their students' turned in below-average results, they'd have to pay a portion of it back on a pro rata basis. On the flip side, above-average student performance could earn them additional bonus money, up to the full $8,000. 

The results?  There was no/little change in student performance if the teacher had the traditional type of bonus payment at the end of the year.  Students gained as much as a 10 percentile increase in their scores if their teacher received a bonus at the beginning of the school year.   Do you think these teachers were checked for whips before going into the classroom everyday?  There is no mention in the article about the psychological impact teachers and students at yearend.  I guess economists don't consider that newsworthy.

The results of this study can be explained by the psychological term “risk aversion”.   Risk aversion is a method of motivating behavior.   It has been studied for 30+ years in psychological and economic research.  Research indicates that psychologically, losses are twice as powerful a motivator as gains. People tend to strongly prefer avoiding losses to acquiring gains.

Now . . . what if we used this method in private industry for managers?  Think it would work?   Do you think it would end up causing stress and anxiety?  Who wants to subject themselves to the stress of seeing his/her bonus stripped away?   And what about employees?   Would managers put extra pressure on employees and micromanage them in an effort to insure better performance?

Is this a bad idea, or just a mean one?  I think it's both.

I have to disagree with Peter on this idea.  I think it has more potential negatives than positives.  It might lead to better performance on the part of managers---but the downside would almost certainly increase pressure on both managers and employees.    Also, I really don’t think top management would ever agree to awarding bonuses to managers before they “earned” them --- even if they could be “clawed back” later.  

So Peter, thumbs down.   But, as always, I hope you continue to throw out new ideas.   The majority of them are good in my opinion.    Even the ones we may disagree with make us think about new possibilities out there just waiting to be discovered.

Jacque Vilet, President of Vilet International, has over 20 years’ experience in Global Human Resources with major multinationals such as Intel, National Semiconductor and Seagate Technology. She has managed both local/ in-country national and expatriate programs and has been an expat twice during her career.   Her true love is working with local national issues.  Jacque has the following certifications:  CCP, GPHR, HCS and SWP as well as a B.S. and M.S in Psychology and an MBA.    She belongs to SHRM, Human Capital Institute and World at Work.   Jacque has also been a speaker in the U.S., Asia and Europe, and is a regular contributor to various HR and talent management publications.  She lives in Dallas and has 3 four-legged children and one Chinese daughter (it’s a long story).  She’s had a life-long love of animals and the ocean.   So why is she living in Dallas?

Image courtesy:  fishbowl.com

Comments

[Chris Young]

The idea of giving managers their bonuses (at target) at the beginning of the year when goals are developed and then a portion, or all of it taken away at the end of the year if some or all of the goals were not met is interesting on paper.

The biggest challenge I see is the manager actually taking the bonus away throughout the year. Most managers I have come to know lack the intestinal fortitude to actually hold employees accountable - particularly at this level.

Excellent post!

[E. James (Jim) Brennan]

Was that a different study from the ones cited by Dan Airley in "Predictably Irrational"? I like it because it lights an internal fire not usually reached by conventional incentives paid after the fact.

It's only different in degree from declaring that you may lose your job if you fail to perform adequately. But I might apply it theoretically rather than literally: display the promised money rather than actually award it in advance. Let the earned bonus entitlement diminish throughout the bonus period rather than demand a cash withdrawal from the family bank account. Pre-announcing the bonus anticipated at 100% goal attainment levels can activate the family, too, as they "pre-spend" the award mentally. It activates a much broader audience more closely examining actual progress towards intended objectives. As an extra plus, it forces constant improvement of the goal targeting and feedback mechanisms. After all, don't you WANT people taking their bonus targets seriously?

Precisely because this approach can have greater impact if aggressively communicated, I'd dial down the BHAGoal index quotient for the first few evolutions. Tinker with it to meet your comfort level.

[Jacque Vilet]

Thanks Chris. Yes, intestinal fortitude always gets in the way of a neat theory! How about managers that don't want to give negative feedback on performance appraisals??

Ed --- didn't know about the article you refer to. I'll find/read it. I like your idea of getting the family involved. Nothing beats a "nagging" spouse right?!

And . . . I'm sure everyone else understands your "famous/infamous" acronyms, but I don't. So what does BHA mean? While you're at it why don't you just send me your whole dictionary of acronyms because the issue keeps coming up for me!

[E. James (Jim) Brennan]

If I had invented the acronym, I'd have referenced a link to the definition. It's pretty well known in the performance trade as Big Hairy Audacious, but I'm too polite to spell out such a term. ;-) Hope you weren't trying to swallow your coffee when reading that.

Pink copied Airley's book style but lacks his academic research credentials.

P.S., the E is for Emmet James the Third, so I never use the E name except on legal documents. Jim will always do.

[Lisa J. Williams, SPHR]

I guess he doesn't know many state laws. While the clawback is required by Federal law, several states do not allow money to be taken back once given to employees. Sometimes you can get the employee to sign a document up front for the pay back, but this doesn't even fly in most states.

Also, how do you handle those employees who leave before the target end period? It can be hard to get the money back from them (ever try to get tuition reimbursments back?).

This bonus system recognizes that not everyone is motivated by money. However, just about everyone is concerned about saftey/house/etc.

[Jacque Vilet]

Thanks Lisa. Yes, this is another one of those "great in theory" but not "in practice" kinds of ideas.

You pointed out some important issues ---- how to get money back when employee terminates, etc.

Well Ed --- I bow to your superior knowledge --- when you say "Big Hairy Audacious" is well known to people. Guess I don't "hang out" in the correct circles.

No I don't drink coffee. Diet Coke is my caffeine of choice.

[Paul Hebert]

As others have mentioned... getting the money back is an issue. However, I posited last month in a post on my site - maybe if you used non-cash awards (ie: points, credits) as part of a short term incentive this is a workable solution?

http://www.i2i-align.com/2012/08/harvard-profs-must-be-reading-my-posts-incentives-and-loss-aversion.html/

[John A Bushfield]

Jacque - Interesting concept, and worthy of discussion, as the thoughtful comments submitted thus far attest to. My initial reaction was the same as yours; negatives outweigh positives, claw back issues, etc. However, if you think of it in a more holistic context, it becomes quite appealing.

Group incentives, where all members participate in the incentive program, perhaps at different levels depending upon position, function, etc., might work more effectively using this method. Under traditional incentive programs, it's the pot at the end of the rainbow theory of motivation. If the company put in some skin up front, it crystallizes for the participants the importance of achieving their goals, and might more effectively focus all members of the group to collaborate and help each other out. You can argue that it might be more stick than carrot, but if its all for one and one for all, well, maybe it's worth additional thought.

[Jacque Vilet]

John I agree with you about the team concept and have seen it work fantastically but only if the goals are not dependent on direct reports. In other words use this for non-managers. Otherwise I'm afraid of the pressure that would be put on the employees to perform, perform, PERFORM!!!

I've seen group incentives work for individual contributors. Yes peer pressure does work, they collaborate, help each other out .... it's great. Just worry about the idea of using it with managers. As Chris said -- most managers I have known haven't been great at "managing" instead of browbeating and "micro-managing".

Jim --- sorry, can't believe I called you Ed. Guess I can blame it on being Monday!

[Jacque Vilet]

Paul -- great post. I guess great minds . . . You beat me to it.

[Dan Barber]

You can consider that this concept is at work with certain stock awards, e.g., restricted stock. Without a performance element, there is the desire to avoid seeing the stock price decline prior to vesting. With a performance element, the full target value of the award can be easily tied to individual or group performance (and not as subject to the vagaries of the stock market).

[Jacque Vilet]

Paul et al ---- who was it --- Frederick Taylor??? --- that posted each employee's performance at his/her work station fully visible to all. It was a chart or color-coded ??? thing. And it was done at the end of each day.