Incentives and rewards
How incentives are used to encourage, evaluate, and reward people’s performance is an important factor to consider in seeking to influence the culture of an organisation. This includes the basis on which performance is appraised and the behaviours and outcomes that are celebrated and rewarded.
The way many companies assess and pay their people by tying some element of reward to agreed performance goals powerfully reinforces one of the core assumptions which we believe needs to be challenged in creating a purpose-led culture: namely that people at work are more likely to action something if there is a financial incentive. This assumption is deeply ingrained in many companies and the current culture in large organisations of performance bonuses and other financial incentives needs honest and open debate.
There is abundant and powerful evidence that for complex tasks financial incentives crowd out intrinsic motivation and reduces openness to learning and innovation.
This HBR article Stop Paying Executives for Performance drawing lessons from 128 independent studies argues that variable pay can actually deplete performance:
Expected tangible rewards made contingent upon doing, completing, or excelling at an interesting activity undermine intrinsic motivation for that activity.
In his book Payoff (p. 86), having rehearsed the evidence, behavioural economist and psychologist Professor Dan Ariely makes this plea:
Instead of relying only on money as an incentive, we need to expand our scope and examine other motivational forces – ones that provide a greater sense of meaning and connection to work. As people feel connected, challenged, and engaged; as they feel more trusted and autonomous; and as they get more recognition for their efforts, the total amount of motivation, joy and output for everyone grows much larger.
Moving away from financial incentives is likely to be something many companies find difficult to do, at least in the short term. Many have built a culture and a set of expectations in their people around incentives and, even if they decide to move away from this, it may take some time.
A good first step is to invite dialogue and assess how current incentives may be encouraging unwanted behaviours or sending mixed messages about what the organisation values, and to change these.
Exercise:
Some questions to consider:
- What signals do current structures and processes send about what the organisation values and how does this marry with the purpose?
- What behaviours are rewarded and celebrated? What other ways do you use to show recognition, appreciation and gratitude?
- What other ways could be explored and experimented with to celebrate and signal the behaviours that are valued in the organisation.
There is a temptation to seek to adjust the metrics that people are rewarded for and to link pay to a new set of metrics that reflect the purpose. This throws up a whole new set of challenges around metrics. We therefore counsel companies not to rush into designing new incentive structures but to create space for dialogue and research on how to innovate here in a way that helps shift the culture of the organisation in the longer term.
Trying to identify appropriate metrics that are easy to quantify that reflect being purpose-led can be a challenge, particularly if the intention is to reward specific types of behaviour. But finding and quantifying metrics is not the only consideration: there is evidence that linking business metrics to remuneration can have the unintended consequence of people focusing too narrowly on the metric sometimes undermining the actual strategy. This is discussed in the following HBR article: Don’t Let Metrics Undermine Your Business
See also:
- Bosses’ bonuses for zero workplace deaths ‘a terrible judgment on their character’ – which provides some food for thought on the link between metrics and incentives
- Executive pay and climate: can bonuses be used to reduce emissions? | Financial Times – Senior management pay is increasingly linked to sustainability targets, but critics are sceptical this will amount to meaningful change
For more on how to think about metrics and measures see: Assessing progress in becoming purpose-led