Cafe Classic: Frustrated? Here's How Compensation Practices Can Change for the Better

Editor's Note:  Yes they can! And we can create the conditions that make change for the better possible. Margaret O'Hanlon explains!

Look up the word "classic" on Wikipedia, as I just did, and you'll find the definition, " . . . something that is a perfect example of a particular style, something of lasting worth or with a timeless quality."

I just ran into a classic that can change the way we work and make our compensation design decisions far more effective. I feel the urge to share!

"The Inconvenient Truth About Change Management: Why It Isn't Working and What To Do About It" by Scott Keller and Carolyn Aiken was published by McKinsey&Company in August 2000. It's a must read for most of us as we struggle with incentive, recognition, merit and executive compensation designs that fail to live up to their promise. After all, pay-for-performance is, at its core, a form of change management since we are trying to shift behaviors and results from their current state to our desired future state where our strategy-driven performance targets have been met.

Keller and Aiken's inconvenient truths have "consistently delivered business results far beyond expectations" and they have the research to prove it. Their breakthrough is that while the programs that we design are entirely rational, a basic scientific insight about human nature is that, ". . . people are irrational in many predictable ways."

This is a fundamental truth of which HR is fully aware because it gets in our way every day. We can replace some of our frustration and improve our odds of leading successful change by applying their research-based insights to our purely rational designs.

Keller and Aikens list nine "inconvenient truths" that we can apply about ". . . the irrational (and often unconscious) nature of how humans intepret their environment and choose to act."  Here are four that jump out from the page -- but truly, don't miss the entire article. 

#1 What motivates you doesn't motivate most of your employees. Here's one that should influence compensation program design.  There are at least five sources of meaning that motivate employees. Research about employee preferences shows a consistently even 20% split across these dimensions: Achieving industry leadership, making a better society/community, improving things for the customer, belonging to a team and finally, impacting "me" personally. If you  tap into only one of these motivators -- for example, compensation's typical What's In It for Me (WIIFM) theme -- you will only build support from 20% of the employees.

#3 It takes both pluses and minuses to create real energy. Here's one that can really upgrade performance management efforts. Most of our programs ask people to look for the problems that need to be fixed and identify solutions. But research indicates that a relentless focus on what's wrong leads to fatigue and resistance. Analyzing what works and why also achieves marketedly improved results. Why do we do this so infrequently? Our excuse is that humans " . . . inherently dislike losses more than we like gains." When you drop this excuse, there's potential for huge performance gains.

#6 Money is the most expensive way to motivate people. You hear this a lot on the Compensation Cafe! Keller and Aiken provide some telling research indicating that small, unexpected rewards can have a disproportionately positive impact that can last for months. The reason? People see these rewards as a "social exchange" and feel a range of favorable emotions that don't come into play with compensation-based "market exchanges."

#8 Employees are what they think. This one applies to any dimension of pay-for-performance. In our rational program designs, we address behaviors because they drive performance. However, we ignore what drives behaviors. There is extensive research that shows . . . "Mindsets (the thoughts, feelings and beliefs held by employees) drive behaviors." If we want to truly achieve behavior change, it is misguided to keep insisting it's purely about good data and effective measurement.

Margaret O'Hanlon, CCP brings deep expertise to discussions on employee pay, performance management, career development and communications at the Café. Her firm, re:Think Consulting, provides market pay information and designs base salary structures, incentive plans, career paths and their implementation plans. Earlier, she was a Principal at Willis Towers Watson. A former Board member for the Bay Area Compensation Association (BACA), Margaret coauthored the popular eBook, Everything You Do (in Compensation) Is Communications, a toolkit that all practitioners can find at https://gumroad.com/l/everythingiscommunication.

Comments

[Katherine Macrone]

The link to the article isn't working "page not found" can this be updated or can a copy of the article be posted here in PDF? Thanks!

[Margaret O'Hanlon]

HiKatherine. The article is a McKinsey classic, so they have it posted as a pdf. Type the title into your search engine, and the pdf should show as one of your top options.

[Ann Bares]

Katherine and anyone else having trouble finding the article - I have updated the hyperlink to take you to the pdf that Margaret references above. Sorry for any inconvenience - thanks, as always, for reading!

[Jessica@homeaddons]

I'm glad you shared this. It is a good read and indeed very helpful. I wanted to learn more. The link didn't work the first time though but I tried again and I had it up ;)

[Katherine Macrone]

Thanks! I read this blog every day. Some days before my Facebook.....