Why we need to pay attention to performance incentive problems
From the moment we can first walk and talk. We are motivated, controlled and rewarded using a combination of targets and incentives. Which parent hasn't used a sticker chart in a desperate attempt to get the kids to cooperate with them?
Targets and incentives are so deeply embedded in a modern society that many of us don't even notice that they are core to almost every aspect of our lives. That would be fine if they worked properly, but there is plenty of evidence every time you open a news website that they often don't work very well at all. Here's a selection of performance incentive problems from the news....
- Ex-Audi boss stands trial over 'dieselgate' scandal in Germany - fallout from Volkswagen Audi manipulation of EPA emissions tests.
- Lloyds profits nearly wiped out by £1.8bn PPI hit - Financial mis selling scandal driven by agressive sales targets for highly profitable 'payment protection insurance' products.
- ...how some funds hide poor performance that can derail your retirement - A lack of rules around reporting and intense commercial targets drive jaw-dropping liberties when it comes to the reporting of fund performance.
A quick refresher on what incentives are...
What is a performance incentive?
If KPIs provide objective numerical quantification, and targets provide the context then incentives are intended to provide behavioural motivation. An incentive can be either positive (I buy myself a new smart watch if I hit 80 kg), negative (I will put a padlock on the fridge if I hit 85 kg) or some combination of the two.
The impact of performance incentives problems...
There is a high chance that performance incentive problems are seriously impairing the performance of your organisation. The big challenge with performance incentive problems is that they are often silent and invisible but there are a few symptoms that should make you want to dig deeper...
- High team attrition
- Lots of management time spent on performance target disputes
- Disappointing organisational performance
- Missed targets and goals
- Team apathy and cynicism
- Rule breaking, use of loopholes and even lawbreaking
The first step in curing any disease is to diagnose the condition. The good news is that many of the performance incentive problems we see come up repeatedly, across many types of organisation. We can learn from the failures of others. (For the background stories behind where these diagnosis codes come from, check out my book "GAMED: Why targets and incentives fail, and how to fix them").
The the performance incentive problems listed below are the result of reverse-engineering dozens of high-profile case studies of performance incentive problems.
Seal your reputation as a KPI Pro
Online KPI Black Belt Programme
Why performance incentive problems might be killing your team performance
Badly designed incentives can create all kinds of visible and invisible issues. The impact can range from despair, high attrition, disengagement, frustration and failure through to anger, unexpected bonus costs and lost customers. Think of incentives as a bucket of gasoline, and you get a good idea of how carefully they need to be handled and used!
The 8 most common performance incentive problems
1. Low perceived incentive value to extrinsically motivated parties
Description
This performance incentive problem is where a person is motivated by external reward, the incentive rewards on offer are not motivating.
(Check out this post for more information on the difference between intrinsic and extrinsic rewards: What are extrinsic rewards and do they work)
Why this is a problem
If an extrinsically motivated person is offered a reward below their expectation for hitting a given target, then a partial or complete loss of motivation can be expected.
Example
In a manufacturing business, which the author worked with in the 1990s, the factory bonus was set so low that one of the workforce painted the words ‘bonus shifter’ on the side of a wheelbarrow and left it in a prominent position on the shop floor. Clearly the bonus did not have the motivational impact intended.
2. Extreme reward or punishments
Description
Where the external [extrinsic] reward is of huge importance to the person targeted. Prison, death or public humiliation are examples of extreme punishment. Extreme rewards might include significant wealth, a major sporting title or a prestige job.
Why this is a problem
Where extreme rewards or punishments are offered, it can drive extreme, dangerous or illegal behaviour in an attempt to achieve/avoid that incentive.
Example
Successful sales professionals are often motivated by reward, but at the other end of the performance spectrum, those showing poor performance often have a justified fear of being fired. Fear of job loss often drives extreme behaviours such as selling to customers that they know will not be able to pay, will return the product or will not yield a profit.
3. Non differentiated incentive types
Description
This performance incentive problem crops up where graded rewards are used (1st place, 2nd place etc.) making the lesser prizes an inferior version of the first prize is an example of 'non differentiated incentives', lessening the motivational effect of the lesser prizes.
Why this is a problem
If a lower-tier prize is seen as simply an inferior version of the main prize it removes the ability of the winner to rationalise that they 'preferred the prize they won anyway' and so reduces the motivational power of that prize.
Example
A non-differentiated set of prizes is…
- 1st Prize: 5 days in a star Hawaiian 5-star boutique hotel
- 2nd Prize: 4 days in a 4-star national hotel chain
- 3rd Prize: 3 days in a 3-star national hotel chain
A set of differentiated prizes would be…
- 1st Prize: 5 days in a star Hawaiian 5-star boutique hotel
- 2nd Prize: A weekend for 2 at a PGA golf resort
- 3rd Prize: A supercar track experience
4. Winner takes all
Description
This performance incentive problem occurs where there is a single winner, with no reward for any other performances, this is 'winner takes all'.
Why this is a problem
A 'winner takes all prize' will normally only motivate a small section of the population, those who think they have a reasonable chance of winning that prize, with no motivating effect on the remaining majority.
Example
Many elite sports competitions, such as The World Cup or the Tour de France, are ‘winner takes all’, at least in terms of prestige and recognition
5. Capped rewards
Description
A capped reward is where there is a ceiling, or maximum, on the reward that can be won for an open-ended task (e.g. sales). Past the upper limit there is no further reward.
Why this is a problem
A capped reward completely removes any further incentive, once that cap has been hit. Studies show that a capped reward will have a reduced performance benefit compared with an uncapped reward.
Example
An extrinsically motivated salesman is one that is motivated by external reward. Assuming that external reward has driven them to achieve their sales target, it is not unreasonable to assume that once they achieve their target and no extra reward is available, their motivation will be capped too.
6. Low-attainability driven disengagement
Description
Where a target is regarded as 'unattainable' by the recipient (regardless of whether it really is unattainable or not) this can lead to an performance incentive problem best described as 'disengagement'.
Why this is a problem
A target will only motivate if an individual has some belief that they can reach it. If there is no belief that a target is achievable then it will have no motivational/incentive benefits.
Example
This direct quote, from an employee review of their employer summarises the impact of ‘unattainable’ targets…
‘The people you work with are great people. However you're expected to achieve unrealistic targets every day, which is highly demoralising. If the company asked you to try and reach a realistic number, people would be motivated to work hard. Instead they constantly put pressure on you to reach a target which can only be achievable if every email is a simple case that can be resolved in a few minutes, most are not this easy. Management need to realise these targets are doing more harm than good if they want a company people want to work for.’
7. No over-achievement rewards
Description
The ‘No over-achievement reward’ failure is a type of performance incentive problem where a high performer exceeds their targets but the incentive scheme does not reflect this over-performance though an increased reward rate.
Why this is a problem
Studies have shown that offering a (progressively) increased reward when an individual exceeds their targets will lead to 17% higher levels of performance. In not offering over-achievement rewards we miss this opportunity. [ref. Thomas Steenburgh]
Example
One practical use of an over-achievement reward would be when selling a house. Offering the estate agent/realtor a very high commission rate for any sales price premium they achieve, perhaps anything above 105% of the current market rate for a property, will give you a good chance of outperforming the market average price.
In this situation, you offer the sales professional a generous slice of revenue they might not otherwise realise, so it is low risk to the seller and beneficial to both parties to be generous with the commission on the ‘surplus’ sales revenue. Of course, you should agree this type of deal after the salesperson has valued the property and do a separate market check to avoid the sales agent ‘gaming’ the expected market price and commission.
8. Offering material rewards to intrinsically motivated parties
Description
Our final common performance incentive problem is where a person is driven by intrinsic motivation, such as satisfaction or altruism, but is offered external [extrinsic] reward.
Why this is a problem
Offering extrinsic rewards to intrinsically motivated individuals (for example charity volunteers) has been shown to reduce levels of performance in those intrinsically motivated individuals.
Example
A study of Swiss volunteers by Frey, Bruno, Götte and Lorenz found that offering a small financial reward to volunteers decreased the number of hours they worked, compared with those offered no financial reward.
Radically improve your KPI targets and incentives with the ROKET-DS approach
The performance incentive problem types listed in this post are part of a larger diagnostic tool called the ROKET-DS diagnostic. That diagnostic tool is, in turn, 'Step 0' of the ROKET Design System (ROKET-DS), a step-by-step method to take you from your goals through to fully implemented and tested KPI targets and performance incentives. To learn more about this system you can buy a copy of GAMED, sign up for the on-demand online course, better still, join the next KPI online Black Belt Programme.
Read how to design targets and incentives that really work
Learn how to design targets and incentives that really work
