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Do performance incentives help or hinder your business?

 

For full disclosure, I have a fundamental problem with large cash performance incentives. In my view they drive perverse outcomes that can have a long term detrimental effect on the cultural and structural health of your business. Linked to these performance are business performance metrics, so the conversation will transcend both topics to some degree. 

 

Back to my question, and ignoring the above rant, the answer to that question links directly to your business strategy. 

 

If your strategy is fast growth and a quick exit, then the answer might well be yes. Fast growth requires relentless energy and personal investment for a defined period of time, to push a business towards a time bracketed goal. I have lived this path and carry both the benefits and the scars from the experience. This short sharp strategy does not afford the leadership time to culture and cultivate a sustainable culture. They just need to get the numbers where they need to be to maximise profit on exit from the business. 

 

Upside of this approach is that you may step out with a hefty wad of cash in your back pocket. The downside is typically there is significant carnage left in your wake. It is very possible that, in banking your cash you have burnt out your team and left the business structurally weak. Also, when you cash out, your leadership team will likely do the same, leaving the organisation exposed.  

 

However if your strategy is to build a sustainable business, my experience is that it will hinder the business long term. A foundation of a high performance team is built on trust. This trust needs to be able to traverse all levels of the organisation and this is only possible if everybody plays a fair and equitable role.    

 

Incentives can test people's ethics. If the prize is great enough, many (if not most) people would make different decisions, and by different I mean self-serving. The following example demonstrates this.

 

Many years ago, as a young 20 year old I worked in a warehouse. This was before computers so everything was manual. The sales representatives would come back from their week out of town visiting clients and walk into the warehouse with 50-60 orders each. One rep in particular was keen to get his orders out first so he used the most basic of tools to make this happen… bribery. He would walk in and, out of earshot of the branch manager and the other reps, announce to the warehouse team “If you get all my orders out by the end of today, I will throw $10.00 across the bar at the pub”.

 

For context, I was earning $32 per week and a jug of beer was about 60 cents, so relative to what we were all earning at the time, we were up for 16+ jugs. A jug of beer is about 1.5 liters.

 

And this is where our decision making became self-serving. Decision number 1 was putting the other reps orders below his orders, a poor outcome for both the other reps and their customers. 

 

We would work well as a team, busting through these orders but often falling 5-6 orders short. So we told him that we didn’t make it and that he could keep his $10.00… right? Wrong! Decision number 2 was to place the incomplete orders down the pile and tell him “all done… cough up the money”. We didn’t meet the agreed performance metric being all orders out by the end of the day, so we manipulated business operations to protect our incentive.  

 

If that offer was not on the table we would have completed that same amount of orders in the order in which they were received and no-one would have been disadvantaged… and we wouldn't have had a hangover the next day.  

 

This is a simple version of how incentives corrupt. Now imagine you had $200,000 riding on a performance outcome. What would you prioritise or hide to protect that? 

 

Large incentives without solid controls will more likely than not, result in business operations being manipulated to protect payouts. By virtue of this, the business is being misinformed around its performance and will likely make critical decisions based on misinformation.

 

In my experience, most people are happy to be paid a fair day's pay for a fair day's work. Large cash incentives, typically the domain of executive leadership, creates a ‘them and us’ division within the organisation. Reflecting back to my earlier statement, high performance teams are predicated on trust and that trust must be able to traverse all levels of the organisation. If you create ‘class’ structures through imbalanced remuneration, the flow of that trust may be impeded.