According to behavioral economists, we have a lot to learn about designing cash incentives. Oddly, opacity rather than transparency is the advice coming from a recent paper in a highly regarded journal. The findings should give you something to stew over on these dark winter nights. (They did for Yale, which passed the findings on to their School of Management alumni.)
The researchers want to help you eliminate employee "gaming" of your plan design. You know the problem. It is common with MBOs, Sales programs and classic incentive designs. Employees find an easier version of performance criteria; or they notice loopholes; or they unearth other ways to make plan payout guidelines easily serve their own self-interest to "win, win, win" -- and thus diminish the plan design's goals of driving performance to achieve business results.
The research findings suggest that a degree of deliberate opacity about either certain performance criteria for earning rewards, and/or the criteria weighting, will lead to more effective performance. This is not the kind of advice we often hear, so an example will help.
We are, it seems, highly risk averse. Uncertainty is really uncomfortable for us. We know we can't eliminate it, but we can act to reduce it by searching out clearly reliable paths to success.
Why does this matter at work? Employees -- like all of us -- look for 1) the easiest path to success, that will 2) reduce the discomfort of uncertainty. For example, if you weight MBOs, employees are likely to focus exclusively on the few highly weighted ones, as we all know from experience. The research explains that this is because employees strive for the "optimal degree of uncertainty."
To be candid, employees can be pretty certain that the 5%- and 10%-weighted MBOs don't really matter, so it's optimal to skip them. And they can be very certain that they can "win, win, win" through achievement of the highly weighted MBOs, so it's optimal to focus on them. (In this example, the employee still feels some discomfort, but it's less important than the optimal feeling of doing less work and getting away with it.)
If there is no weighting on the MBOs, employees will work on a different version of "the optimal degree of uncertainty." They will choose to work on all objectives at peak performance because the "uncertainty about the weights in the compensation schedule induces a more balanced effort profile" on their part. They can't guess where to put their primary focus, so they put effort into all of their MBOs. (Again, there's a little discomfort, but it's optimal to take the safest route to success.)
In this case, employees have the option to work on a few select (unweighted) MBOs to the detriment of others, but they'd rather make a "more balanced effort" (even though it may be more work) so they can eliminate the risk that we might not "win, win, win" a favorable behavioral rating.
To further clarify the opacity research, when employees know the MBO weightings, they will not only raise their efforts on the more highly rated MBOs, but also actively reduce their efforts on the remaining MBOs. (Remember all those MBOs with 10% weightings that never get done?) The behavioral economists call this "effort substitution" and consider it to be a reliable principle of behavior -- in this case, a negative one.
The researchers are not recommending a return to the days of opaque black-box plan design. Instead they are pointing out how we can avoid tripping over our own plan design. For example, they explain that group rating is far more likely to encourage high levels of performance than rating by an individual manager because there is greater, built-in, uncertainty in what drives group decision-making so an employees' impulse is to put effort into all areas.
Note that the researchers assume that managers don't have their own risk-averse impulses going on in these examples. We know better. As plan designers, we will continue to favor healthy portions of transparency to make it clearer and clearer where managers' priorities should lie.
But if we want our designs to work, the research tells us, the strategic use of some "opacity" within our plan designs and implementation guidelines would be wise.
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.
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