Compensation Cafe

Should You Pay Your Employees Like Elon Musk?

For those of you who read my posts regularly, you know that I am a proponent of equity compensation and a cheerleader for performance-based programs. I am also passionate about helping the compensation world create more differentiated and targeted approaches to pay. This post looks at an example of that type of innovation.

Elon Musk, the founder of Tesla received a famously interesting equity compensation award in early 2018. The program is an aggressive structure that could be worth around $55 Billion if it pays out fully. Shortly after this, Axon announced that it was giving its CEO, Rick Smith, a similar award, modified to reflect Axon’s scale and potential.

These awards are different and riskier than most companies or executives are willing to stomach. Unlike most long-term incentives, there is a real possibility that both Musk and Smith will receive nothing. Both already have quite a bit of equity, and money, so they have a fairly soft landing if the new programs fail.

Last month, Axon announced it was extending access to its unique program to all full-time employees. As a start, every employee will receive 60 Units under the program. Some will also be allowed to contribute a percentage of their pay every year from now through the next nine years. If goals are met, the return can be as much as 3X the units allocated over the nine-year period.

If it sounds complex, it’s because it is. But that doesn’t mean it’s wrong. The company put together FAQs to help people better understand the details. Complexity is always a potential concern, but many complex plans have worked well in the past. The key to complexity is communication (and lots of it.)

Is it too odd to work? It’s too early to tell if the program will have a lasting impact on talent acquisition, staff performance or long-term retention. Different has worked well for many companies in the past. It has also failed spectacularly many times. But, fear of the unknown has not scared employees away from working for tons of companies who are at the leading edge of their industry.

Is it a good idea to treat employees the same way you treat the CEO? Over the past 20 years, there have been growing complaints that CEOs are paid too differently (and richly) when compared to rank and file employees. Calls are regularly made to hold down executive pay to allow for better support of everyone else. Axon turned this idea on its head and offered everyone a chance to get paid like a CEO (kind of, but not really.) Since truly limiting CEO pay seems unlikely, perhaps giving everyone a similar program will bridge the divide.

Is this program better than the “off-the-shelf” vanilla programs offered by so many companies? Will the employees appreciate something special instead of something generic? In my experience, most employees at startups and high-growth companies prefer to be treated like they are special. The program is certainly better if everything pays out at the max. It is quite likely worse if the company stumbles (or worse.) If Axon provides competitive base pay, its employees may be fine giving up a little to get a lot. Just to hedge my bets, I will also add that most people are fine with risk until risk becomes reality.

I don’t know if everyone should be paid like Elon Musk or Rick Smith. As much as this program purports to deliver similar pay the limited percentage for contributions help make this program less extreme. I do know that it is heartening to see companies exploring truly new approaches to pay. I get excited every time a company tells me that they want, or need, to do something different. I look forward to seeing how all of this plays out and hope that, literally, no other company decides to follow this in a lock-step manner. Be bold and find your own path!

Dan Walter is a CECP and CEP and works as Managing Consultant for FutureSense. He is passionately committed to aligning pay with company strategy and culture. Dan is a leading expert on equity compensation issues. Dan has written several industry resources including an issue brief on Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.

Cafe Classic: Global Compensation Philosophy - One Brand, 31 Flavors

Editor's Note: What better to warm our hearts in January than a global compensation strategy informed by an ice cream brand analogy.  Take it away, Dan Walter!

Multinational companies have enough complexities, why add to them? This is a refrain I hear from people who promote “global” programs in which a single tool is used across all regions to help build a corporate culture. For the sake of simplicity, let’s will call this the vanilla plan. In all the years I have been in this industry, I don’t think I have seen a vanilla plan work for more than a couple years. Tons of money can be spent in design and communication, but global markets, regulatory changes, management goals and other factors all change too fast to allow any long-term traction to this type of program.

I prefer a more flexible concept where everyone gets a similar tool. You can build in variations on the theme to ensure everyone gets something that works for their needs.  Let’s call this the 31 flavor program. Everyone gets ice cream, but there are enough flavors to keep nearly anyone happy. Some flavors are always available and in use, while other flavors are traded out as seasons and tastes change. These programs allow better alignment with current rules and an easier path for making modifications to meet future changes.

Some companies claim to have these programs, but when you look closer they actually just have many different variations of vanilla. Handling these multi-vanilla programs is nearly as difficult as those with many flavors, but without the added flexibility.

Obviously, there are tons of reasons to stay away from 31 flavor plans, but few of them are based on the fact that they don’t work. Administration can be a real issue, but systems are getting better everyday. Communication, though, is not a valid argument. In fact, designing programs to better fit local norms can allow for a far more streamlined and effective communication effort.

Company A decides to roll out equity around the world. They read that RSUs (Restricted Stock Units)are fairly easy to get approved in most countries and design a typical US-style program with units vesting annually over three years. They roll out this plan around the world without regard for average tenure of employees in different locations. They work to create competitive global market differentials, but don’t put much research into the tools and associated features their non-US competitors are using to deliver those pay levels. They spend a ton of time and money explaining how the program works, why the international employees have a plan that does not take advantage of their local tax-qualified plans and how the plan is designed to motivate and retain them for the future. Employees get similar pay offers from competitors with tax advantaged plans, or plans that simply fit their cultural norms and key players slowly drift out the door.

Company B spends a bit more time working to create a more flexible framework. Not only does the plan allow for multiple variations of features on RSUs, but they also offer locally tax-qualified sub-plans in locations with large enough, or critical enough, populations. The plans are communicated by combined teams of professionals from the corporate headquarters and locals with experience and expertise in the specific plans and local culture. Employees see no reason to leave as long as the company performs, because both their pay levels and delivery mechanisms are competitive. More importantly, they can understand the programs and talk to friends or colleagues who have similar compensation. As rules change, headquarters stays updated via the local players. Changes are made when needed and desired employees become long-term team members.

Yes, the examples above are simplified. Of course, there are implementation and administrative costs associated with the 31 flavor approach. But imagine if you walked into a store that sold only ice cream and when you looked into the freezers you saw tub after tub of slightly off-white vanilla ice cream. No matter how great it tasted, you wouldn’t want to come back often. Most importantly, its unlikely you would ever recommend the place to your ice-cream loving friends.

Dan Walter is a CECP and CEP and works as Managing Consultant for FutureSense. He is passionately committed to aligning pay with company strategy and culture and is considered a leading expert on equity compensation issues. Dan has written several industry resources including an issue brief on Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.

When Will Digital Disruption Show Up in Your Neighborhood?

Yesterday I got an email offer to attend the webcast, "How to Market 'Analytics' without Scaring HR with the 'A' Word."

You know what that tells me? HR is already developing a reputation for avoiding digital changes. One of the goals of the webinar is, "DON'T Scare them [HR] with complex number models."

For Pete's sake.

How is this turn of events possible when such a high percentage of companies have incorporated analytical reports when purchasing transactional HR software for talent management, benefits, compensation and Total Rewards?

One reason is that HR has used a careful, incremental mentality when adapting these changes, building a comfort level one step at a time. But on the business side, customers have been demanding that a full range of high touch purchase and service levels be available online and your line departments have been racing to provide them. Today's pressure to compete in the marketplace is undermining incrementalism, forcing line managers to learn how to lead without traditional comfort levels.

Throughout business, the pressure to adapt analytic and other digital practices is gathering toward a tsunami level, confusing  pretty much ALL decision makers due to universal inexperience with the new practices. Nonetheless, HR needs to participate in this impending "disruption" as a full and equal partner.

If the river's already flowing, how and where do we jump in? Here are a couple of thoughts that should help us launch.

There are a lot of emotional barriers to making the digital changes, barriers that we will have to face up to, along with -- don't kid yourself -- your C-Suite and line executives. McKinsey gives a great overview in, "Digital strategy: The four fights you have to win." The article takes about seven minutes to finish and will provide you with insights that build your confidence for venturing deeper into analytics. In addition, the article educates you on what your team members in line positions are facing.

When it comes to a talent strategy, the new details may seem hard to envision without in-depth technological expertise. Jobs introduced into a company to accelerate the pace of technological change is a valuable thing to know and a good place to start. Insight into these job titles and roles is provided in McKinsey's "Ten red flags signaling your analytics program will fail."

When will you be expected to be an expert? There's no telling, but I'm thinking that performance management may be one of the first HR targets as the tsunami hits. After all, information provided by the new analytics should be able to inform the definition and assessment of performance more easily and quickly than ever before. And on the competency side, behaviors like technological abilities, openness to change and so on, are growing in their importance to your company's business results.

And if you don't scare easily? You may be up for disruption of performance management's well-known weaknesses. The new digital environment will create a cultural rationale for real innovation . . . and may inspire revolution.

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.

Cafe Classic: What Motivates Creative People?

Editor's Note:  Motivating and rewarding creative work - now THAT'S a Classic challenge.  Jacque Vilet presents and discusses research featuring the perspectives of CEO's.  Does it match up with your experience and the lessons learned at your organization?

Until now creativity has been viewed as important but not essential for the survival of a company.  Companies instead have focused on efficiency, productivity, and continuous improvement to lead them to success.

But priorities are dramatically changing. In a Global CEO Survey conducted by IBM, CEOs identified "creativity" as the most important factor for the successful company of the future. 

By “creativity” they mean truly innovative skills found in jobs like architects, data scientists, designers, etc. ---- skills believed to have true strategic value.   Any employee can be creative in his/her work, but the result is not likely to be a “show-stopper” for the company as would the work results of this “creative group”.

Creative employees are different—certainly in the workplace.   Most of them just don’t care about the same things as other employees.  Because they are different, managers have had difficulty knowing how to motivate them.  None of the usual practices that work with other employees seem to work with them.

Creative employees are intrinsically motivated.  They set extraordinarily high standards for themselves.  Research has shown that management can’t get them to work harder or perform better by saying “here’s some more money”.  When extrinsic rewards are being dangled in front of them like carrots on a stick, they feel externally controlled — which becomes a negative for motivation. It’s almost like the more you pay them to do what they love, the less they will love it.

Of course companies need to pay them “enough” to satisfy them. If they don’t, compensation becomes a sore point and distraction.  In addition, they might have a spouse who is less interested in creativity than in paying the mortgage and saving for the kids’ college.

But if management really wants outstanding creative performance, the key is intrinsic motivation– the work itself. 

This is consistent with what I have been told by a couple of my creative friends who have started up companies and now are venture capitalists.  It’s not the money that motivates them (even though they usually make tons of it).  It’s the challenge, the “aha” moments, the discoveries that lead to significant breakthroughs that are the “highs” creative people live for. It’s almost addictive, and it’s absolutely the driver behind their success.

Example:  The wife of one of these friends tells the story of one of her husband’s “aha” moments.   He was in the shower when he had an “aha” moment ---- bolted from the shower and ran naked and dripping wet through the house to his office pumping his arms and singing at the top of his voice.  His path took him through the family room where she was entertaining some friends.   He was totally oblivious --- caught up in the high.

So how can management use the work itself to motivate creative employees?

1) Provide them the right work environment ---- free from bureaucratic excesses, administrative work, unrealistic/changing deadlines, company politics and micromanagement.   
2) Don’t make status check calls and keep track of what’s done/left to do. Spend time with them and really listen to what they have done. Try to understand how they approach and solve problems and what has worked/hasn’t worked.
3) Give them an important problem to solve that the company urgently needs solved. Let them know (if true) that no one else has been able to crack it. This can be a real motivator.

Being told what to do and how to do it with no tolerance of failure, little expectation of recognition, and arbitrary deadlines, can kill motivation. But providing a positive atmosphere where failures are examined constructively, where management really listens and success is recognized in unique ways, can result in spectacular results.

It takes work.  But isn’t it worth it?   CEOs seem to think so. 

What has your experience been in trying to motivate “creatives”?  Any successes you can share?

Jacque Vilet, President of Vilet International, has over 20 years’ experience in Global Human Resources with major multinationals such as Intel, Texas Instruments and Seagate Technology. She has managed both local/ in-country national and expatriate programs and has been an expatriate twice during her career. Jacque has the following certifications: CCP, GPHR, HCS and SWP as well as a B.S. and M.S in Psychology plus an MBA. She belongs to SHRM, Human Capital Institute and World at Work. Jacque has been a speaker in the U.S., Asia and Europe, and is a regular contributor to various HR and talent management publications.

That Can't Be The Right Figure

Anyone who has worked in Compensation can identify with the following scene; you’ve just finished explaining your market-pricing analysis to your clients when suddenly frowning faces appear as they look down at the figures.  “This can’t be right,” someone mutters and suddenly you find yourself looking at irritated expressions.  “You’ve got it wrong.”

Been there?  Heard that?  Of course, you have.  That’s why compensation practitioners receive fewer Christmas cards than their HR generalist colleagues.  Because compensation folks are charged with conducting external analyses and presenting comparative marketplace realities. That’s called sticking your neck out.  But sometimes those realities aren’t welcome news.

Why Are Your Figures Wrong?

If management likes what they see, you’re only reporting common sense, and everyone nods their head.  The only time you’ll hear a complaint (or receive a frowny-face message) is when the market figures you report aren’t what management expected to hear.  In that case, sometimes the knee-jerk reaction is that your analysis must be wrong.  The reasoning behind their negative reaction can vary from a genuine confusion to a defensiveness that somehow, you’re criticizing their past pay decisions.

The accusations can take several forms.  Which of these is what you usually hear?

• You don’t understand my job
  • My job is special (bigger, better, more complex than similar titles)
  • The employee is a terrific performer and their efforts should be rewarded
  • The job description is out-of-date or otherwise inaccurate
  • How can HR know enough about my job(s) to properly match them against other company jobs?

• You haven’t used the right surveys: “Where did you get your data?” is an often-used retort when the market figure isn’t to their liking. Whether it’s about a specific industry, or geography, or even number or type of participants, a common go-to reaction is to challenge the data source.

• The job is really a “senior” position: “Perhaps we haven’t made the description clear,” is another rationale for further study. The job is actually more like a senior, or a lead role. “Our job is more than their job.”

• I’ve heard numbers that are much higher: Another pushback is to quote employee challenges, a newspaper article, or even comments from neighbors or relatives, to make an unsubstantiated case that the “real” market figure is higher.

• The employee(s) will quit: If we go with this so-called market figure. This statement is simply a threat, based more on emotion than objective data.  It’s an attempt to make you feel guilty for what you’ve done, or at least to plant seeds of doubt in your head.

• Have you called around to local companies? “Maybe a custom survey is what is needed.” Here the complainant is more interested in what specific, cherry-picked companies are doing than the general market.  However, the rationale for a custom survey is weakened by higher costs, longer lead times, limited participation and narrowing the scope too much.  Plus, you likely recruit from a wider competitive marketplace than that identified in a custom analysis.

• Recruiting vs. market figures: Do not confuse the two. If the market figure is 100, the recruiting figure for that position is likely to be greater than 100 - unless you’re dealing with an abundant labor market and your candidate in unemployed.  Note: The manager will always be thinking of the recruiting figure, and recruiters often have their finger on the scale, pushing up the figure they think is appropriate (and easier for them to recruit against).

What to Do

Like most other endeavors that deal with variables, the market-pricing process is not exact or formulaic and can be subject to human error as the compensation practitioner analyzes the competitive marketplace.  When that does happen, and objective data is presented to challenge your analysis, thank the manager for the new information and then promptly re-conduct your analysis.  You’ll gain credit for listening and for keeping an open mind.  Points for you.

However, in most instances, your analysis is going to be spot-on and what you’ll be hearing from disappointed managers are in the main excuses, defensiveness (they don’t want to be blamed for decisions they have made), attempts at a blame game and a lack of managerial courage.

Stand your ground. Bend when you must (political realities are always with us) but stick to your analysis and try to anticipate the nay-sayer arguments. Try to have the “gotcha” questions answered before they’re asked.

You still won’t get those Christmas cards, but you will be respected, even by those who disagree with you.

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a clowder of cats.

Creative Commons image, "Appearances," by bark

Career and Life Lessons for Gen Z

Editor's Note: Today's post comes to us courtesy of guest contributor Chris Dobyns.

Over the past several years my high school in Ohio has adopted the practice of inviting alumni who have been generally successful and renowned in their respective career fields to return and provide small groups of students with professional and career advice. The pool of successful and renowned alumni has apparently grown “shallow” recently, evidenced by the invitation I received to come speak in late September of last year. 

Suggested Speaker Guidelines

In the spirit of helpfulness, I received some very formal guidelines to help me structure my remarks. As expected, the guidance suggested describing how I had become interested in my career field and how my education had prepared me to be successful. A description of an “average day”, the pros and cons of my career specialty and the long-term prospects of the profession followed. 

Reading this structured and well-intentioned guidance left me feeling anxious that at the conclusion of my presentation, the most likely response from my student audience – would be the sound of crickets.

Going Off-Script

Accordingly, I decided to focus more on making this a dialogue with the students and to attempt to learn from them. I would leverage my HR know-how and convey the importance (and type) of education, experience, skills, networking and (good) behavior, employers are looking for. I also decided to pass along some "first job advice" to help the students avoid a couple of career "potholes" that I may have naively stepped into in my early years.

The Main Attraction

On the day of the presentation, I was completely overwhelmed to learn that between 35-40 students had signed-up for my session. Made more remarkable because attendance at these events is voluntary and scheduled during the students’ lunch hour.  When I arrived at the designated classroom, I quickly realized that the availability of free pizza and soft drinks may have exerted a slightly greater level of influence on student attendance than the reputation and subject matter of the scheduled guest speaker.  :(

Hooking The Audience

To redirect my audience’s attention from lunch I shamelessly resorted to a time-tested classroom gambit – I showed the group an orientation video about my organization (coincidentally referenced in a prior posting).  When the lights came back up, I appeared to have been at least semi-successful in shifting attention from the pepperoni and cheese.

I made some brief remarks about my professional background and work experience, with focus on my more recent federal service. I then asked a series of questions, which elicited some thoughtful and encouraging responses. 

Refreshing and Surprising Revelations

It’s not new news about the documented reluctance of current teenagers to get their feet wet in the part-time labor pool. However, in response to a question about part-time work, more than half of my decidedly small sample-size audience indicated holding or intending to obtain part-time jobs.  A number of students noted the benefits of that work experience in learning how businesses operate and perhaps most importantly, how to interact with co-workers and the public.

Another quick canvass revealed, not surprisingly, a substantial portion of the audience heading to college after graduation.  Although when asked about advanced degrees, only a few hands went up. The reasons varied, but surprisingly a number of students questioned the value of advanced degrees in today’s world, with the shifting trends and channels in how formal education and knowledge can now be obtained. 

On the question of career and disciplinary interest, many of the students had at least an inkling of their future direction.  And in answer to the critical “$100,000 question” about future salary expectations, I was gratified that nearly every student who responded had a realistic salary expectation, and which was within 5-10 percent of the current market reality, relative to their intended job or career path.

Career Planning and Expectations

In closing, I suggested the students continue to work in developing a balance of both hard and soft skills (collaboration, interpersonal, etc.). I also recommended that while having the framework of a career plan was valuable, they should always remain open to differing career paths that would arise along the way. 

Lastly, I suggested not setting their sights (and career expectations) so high that when everything didn’t work out as planned, they made themselves miserable.  It’s better to maybe aim lower, because in the end they would be more satisfied with the outcomes and what they do achieve.

Everyone probably has a different perspective.  What’s yours?

Chris Dobyns, CCP, CBP is currently employed as a Human Capital Strategic Consultant for the Office of Human Resource Strategy and Program Design for one of the largest U.S. intelligence agencies. The Office of Human Resource Strategy and Program Design is responsible for organizational effectiveness, personnel assessment, compensation and incentives, occupational structure, recognition and rewards, HR policy, human capital program design, implementation, evaluation and assessment and internal consulting. Chris has worked in the area of compensation for more than 35 years, and has been employed in various compensation-related positions by a number of large, private sector companies including, Sears, Roebuck, Arizona Public Service and Westinghouse Savannah River Company.

Original image "Career Expectations" courtesy of Chris Dobyns.

Cafe Classic: Extroverts and Introverts, Rewards and Risks

Editor's Note:  Are you an extrovert?  An introvert?  Have you given any thought to how your personality and unique brain function may impact your response to rewards?  Or just considered the fact that your organization's employees may run the entire spectrum and exhibit that same variance?

Are extroverts more "reward sensitive?"

In combing through the research on personality and brain function, Susan Cain (author of Quiet: The Power of Introverts in a World That Can't Stop Talking) concludes that they are.  This conclusion, or at least its strong probability, raises some interesting questions for workplace culture, performance and rewards.

The term "reward-sensitive" has been coined by psychologists and applies to people who are highly motivated to seek rewards.  As Cain notes, "reward sensitivity motivates us to pursue goals like sex and money, social status and influence.  It prompts us to climb ladders and reach for faraway branches in order to gather life's choicest fruits."

In introducing this idea, Cain calls our attention to the work of Dr. Janice Dorn, PhD in neuroscience with a specialty in brain anatomy, M.D. trained in psychiatry, who works as a "financial psychologist", having counseled more than 600 traders as part of her practice.  Dorn notes that her extroverted clients are more likely to be reward-sensitive, while the introverts are more likely to heed warning signals and are more successful at regulating their feelings of desire or excitement. 

The answer to why extroverts and introverts might react differently to the prospect of rewards, Dorn tells us, lies in the structure of their brains.  Research suggest that extroverts seem to be more susceptible to the reward-seeking cravings of the limbic system (the parts of the brain often referred to as its "pleasure center").  This, and the fact that extroverts appear to have more active dopamine pathways (dopamine being the "reward chemical" that the brain releases in response to anticipated pleasure), causes them to get an extra buzz from the pursuit and attainment of goals.  In fact, some scientists are exploring the idea that reward sensitivity, rather than just a feature of extroversion, may be the thing that makes an extrovert an extrovert.

While this buzz may have the positive effects of firing up extroverts to work hard and giving them the courage to take chances, it can also make them blind to warning signals and danger, leading them to take on outsized risks in pursuit of rewards.

Introverts, by contrast, don't buzz as easily.  Their response to their reward system is smaller.  This helps them be better at delaying gratification and makes them more likely to be cautious, to scan the environment for risks before proceeding, to see and consider peripheral issues.

Cain further postulates that the cultures of many businesses celebrate the go-go aggressive type, the forceful extrovert, and that these are the personality types who rise to the top, while the more cautious and cerebral types tend to be passed over for promotion.  She makes her case that having people with this personality type in control of our capital, institutions and power may be the source of many of the crises of our times, with examples ranging from Enron to Wall Street.

So what does this mean for those of us charged with designing and managing pay systems?  I think it raises some interesting questions, like the following:

To what extent can -- and should -- we assess the reward-sensitivity of our employee populations and organizational cultures, and take this factor into consideration when designing programs?

Many of us work in or serve organizations with extroverted cultures.  How should this fact impact our work in designing rewards?  Should our programs reinforce this culture -- or should they act as ballast, providing counter-pressure?

And what about our own personalities vis-a-vis the work we do?  Some of us are extroverts, apparently prone to be more reward-sensitive, and some of us are introverts.  Do we need to be more aware of our own tendencies, so that they don't overly influence the rewards we recommend?

What's your take?

Ann Bares is the Founder and Editor of Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting and survey administration services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School and enjoys reading in her spare time. Follow her on Twitter at @annbares.

Creative Commons image "Brain" by dirk schaefer

5 Lessons from Glittery Smelly Incentive Plan Mistakes

I hope everyone had a great holiday season. One of the little highlights for me was the video made by a guy who booby-trapped a package on his doorstep to punish package thieves. If you use social media, you’ve probably seen this. Glitter Bomb video.

The video has footage of thieves reacting to an avalanche of glitter and a horrible smell, usually while trapped in a car. The producer invited other people to put it on their porches in order to get more videos of more thieves. He paid people to return both the box and the video. This is where things went wrong.

After more than 30 million people had viewed the video the producer, a former NASA engineer, had to edit out more than a minute of footage. It turns out that incentive compensation doesn’t just work, it can work too well at motivating the wrong behaviors.

There was a payment for a returned box with video of a thief getting bombed. Some people simply had their friends “steal” the box and act out their reactions. Everyone gets paid, no one gets hurt. But then the thing went viral.

Viral videos drive ad revenue, so the producer was making money (and companies were paying money) based on the popularity of the video. When some of the people on the video realized this, they fessed up and the producer did the right thing. He announced that there had been some fraud and that it had been removed and reposted. About a minute of the video was removed and the media coverage of the error and correction has brought even more attention to the video. As I am writing this the video has been viewed more than 51 million times.

What can we learn from this episode?

1. Make sure you design your incentive plan to reduce the possibility and rewards for cheating. Think through all possible results and work to ensure the worst doesn’t happen.
2. Verify results against expectations and be wary of anything that looks “too good.” Great results are great but measure twice before you pay once.
3. Be quick about fixing problems. When you find a problem don’t debate the best path. The best path is always fixing the problem (and never hiding the problem.)
4. Be transparent and honest about errors and their solutions. The truth will come out. It’s more likely to stick to you, personally and professionally, if someone had to call you out on it.
5. Don’t throw away an entire plan, because of a couple flaws. Incentive plans are difficult to get perfect. The best plans require consistent communication and regular evolution. Instead of keeping a bad plan or tossing it away, work to improve it. Practice makes perfect refers to learning the same thing, again and again, to get better and better.

Dan Walter is a CECP and CEP and works as Managing Consultant for FutureSense. He is passionately committed to aligning pay with company strategy and culture and is considered a leading expert on equity compensation issues. Dan has written several industry resources including an issue brief on Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.

Cafe Classic: A Management By Objectives Story

Editor's Note:  This Classic tale about performance management and MBOs by Jim Brennan may be be unverifiable, but I can tell you that I've run into enough real-life situations that come uncomfortably close to this scenario in my consulting work that I feel sure it did happen - and probably continues to happen.  

Post Introduction by Jim: This apocryphal story is too good to ignore, even if it can’t be verified.  I learned it in my corporate training and development days many decades ago, from a boss who had taught at GMI after studying MBO under George Odiorne when he was a UMprofessor... so it is second-hand.  We told this story every time we taught the performance management module of the Basic Supervision course we conducted for all new supervisors from foreman up to VP level.

While the idea for the process called Management By Objectives (MBO) was first advanced by Peter Drucker, it was practitioners like University of Michigan Professor George Odiorne who struggled with the details of exactly how to best implement the theory.  Every summer, Odiorne would take time off to conduct surveys at major employers who had embraced the concept.  One year, his survey concentrated on the degree of MBO satisfaction between the boss and the subordinate.

Professor George Odiorne walked into a supervisor’s office with a clipboard in one hand and a separate sheet of paper in the other. 

The supervisor sighed and said, “Yes, I know.  You are that professor my boss said I had to talk to.  Whatever you ask, I’m supposed to answer and give you full cooperation.  OK.  Ask away.”

Dr. Odiorne sat down and proceeded to ask the supervisor a series of questions dealing with his perceptions and opinions.  Periodically glancing at the separate page, he made notes on the clipboard answer sheet.  At the end of the short interview, when the professor thanked the supervisor for his assistance in his survey and prepared to leave, the employee asked a question of his own.

“Tell me, professor, what is that sheet of paper you kept looking at when I gave my answers?” 

Odiorne replied, “Why, it was a copy of your objectives. I got it from your boss.”

The supervisor’s eyes got real big.  He jumped up, rushed past the researcher and carefully closed the door.  Furtively turning around, he lowered his voice and whispered, “How much do you want for it?”

Odiorne said, “Here.  Take it.  I won’t need it any more, now that I have your answers.”  With the thanks of the supervisor ringing in his ears, the puzzled professor went on his way.

He thought nothing of it, until many months later, he got a phone call from the boss.  “Doctor Odiorne, after you interviewed my man last summer, his performance did an abrupt turn-around.  I volunteered him for your survey because he was my worse supervisor with the lowest performance ratings every year.  But after you left, he changed into a super-star.  All of a sudden he started doing everything right!  Whatever you said to him made him a new worker.  Tell me what it would take to have you come back here and do the same thing to every other supervisor I have.  I’ll pay it, whatever it costs.”

By this point, the professor was embarrassed.  “Actually,” he admitted, “I really should have told you before I left, but all I did was give him a copy of his objectives list.”

There was a long silence at the other end of the line.  Then Odiorne heard the boss mumble almost to himself, “I’ll be damned.  I should have known the son of a bitch cheated!”

E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience in most industries.  After corporate HR posts and consulting CEO roles, he was Senior Associate of pay surveyor ERI before returning to consulting in 2015. A prolific writer (author of the Performance Management Workbook), speaker and frequent expert witness in reasonable executive compensation court cases, Jim also serves on the Advisory Board of the Compensation and Benefits Review.