Better Thinking: The Case Against Targets, Rewards, Incentives, Performance Appraisals and Ranking Workers
Assumptions are something many corporations are built on. The way they design work is copied or emerged (without thought) as people attempt to get the work done. Work is managed in a similar manner. Many can not identify scientific management theory in the design and management of work, but it exists nonetheless. Break apart each function (in design) and optimize each piece (in management). This thought process runs itself all the way down to the individual. If we just have everyone giving 150 percent (whatever that means) then the company would be successful. The ability to analyze and optimize the pieces rarely (or never) optimizes the whole. Managers are good at analysis (ability to break things down), but not in synthesis.
This isn’t really one topic, but several. Here we go, the demons of all demons . . . targets, rewards, incentives, employee performance appraisals and ranking workers. One thing I’ve discovered over the years is some people will fall into one of these categories:
- Calm down, Tripp. What’s the big deal?
- I am with you on this/these (fill in the blank), but not this this/these (fill in the blank).
- You are truly demented and insane.
You be the judge. Here is my argument:
Targets, Rewards and Incentives
Let’s start with a fundamental understanding of variation. This is important because variation was what W. Edwards Deming used to teach the Japanese how to manufacture products better. Quick count: GM and Chrysler—bankrupt. I rest my case. He did this with a country that had more earthquakes than resources. In Deming’s words (paraphrased), "the height of American industry was achieved from 1950-1968, we have been in decline ever since. We had no competition after WWII, anything we made could be sold." The decline continues to date. So what is it that Dr. Deming understood that management does not?
The above chart reflects a control chart first created by Walter Shewhart in 1932 at the Hawthorne Plant in Chicago where Dr. Deming worked. I won’t spend time going through the significance and how to calculate, but for those who want to learn more, visit http://blog.newsystemsthinking.com/blog/bryce-harrison/0/0/service-metrics-what-you-need-to-understand, for starters.
I got this data from a call center on the number of calls a call center representative averages. This individual averages about 100 (99.9) calls during the time period the data was collected and can expect between 44 and 155 (155.7 on chart) on a daily basis. The data are predictable—this person will continue to perform this way into the future unless the system changes.
What does this mean? This means that no matter what target you put into place, incentive, reward, appraisal or ranking you give this person they will predictably perform at this level (between 44 and 155 calls) unless the systems changes or they find a way to cheat the system. And let me tell you, if you have a reward or incentive out there and/or my living depend on it; I can be very creative in manipulating the system. I have seen call center folks hang up on customers to meet their AHT (average handle time) target to either get a reward or not be paid attention to by a supervisor. Some will say that is why we have inspection and/or monitoring . . . and I say you just increased your costs with un-needed work (monitoring/inspection). Worse, targets become the defacto purpose of the worker or manager instead of serving the customer purpose they are focused on the target, reward and/or incentive.
The 95/5 rule. Not really a rule, but what Dr. Deming discovered is that 95 percent of the performance of any organization is dependent upon the system (structure, work design, IT, procedures, roles, management thinking, etc.) and only 5 percent is attributable to the individual. So why is everyone spending time on the 5 percent with targets, rewards and incentives? We are working on the wrong problem and we are paying a tremendous cost in the process for inability to synthesize a system that creates a valuable product or service for the customer. This discounts that improvement is based on the individual.
But the managers have financial goals/targets? Same scenario; the results are dependent on the 95 percent. Further, I have seen more creative accounting in my lifetime than I care to disclose. Questions like, How can we book the revenue early? or declare a larger percentage of completion to get paid or bill the customer? Can we ship this before the end of the month? This is all waste to the organization; it adds no value. Yet, I see it in almost every organization I have worked with across many industries.
What about appraisals of performance? "People need feedback" is a common rebuttal I receive. No problem, give them feedback . . . as really the issue is the scoring that goes along with it. Why do I have to be above average, average or below average? Raise your hand if you are below average? This is a question I ask in my seminars to managers. I don’t get too many takers at the average and below average stage; everyone believes they are above average. Scoring someone into categories like these can only demoralize the recipient of such a score.
Our organization needs performance appraisals to determine raises. More time is wasted in organizations determining who gets a 1 percent increase and who gets a 5 percent increase. In some cases witnessed, the costs in determination have exceeded the increase. There is a great deal of gnashing of teeth in the after effects of who got the best raises and the subjective nature of them usually makes the organization seem like a popularity contest than a business.
Our performance appraisals are objective. I once contracted with a Fortune 500 company that gave a performance appraisal that was "objective." There were 150+ items to score that each manager had to complete for all employees and this took several weeks. The system was eventually scraped (divine intervention). There is no such thing as objective appraisal of performance. It is subjective.
What should I use to replace performance appraisals? Nothing, just like if you quit smoking. You don’t need to put something else in your mouth that is bad for you.
Attorneys require appraisals if we fire someone. I have heard the reverse is true. Attorneys have told me that the subjective nature of performance appraisals calls more things into question in the court of law than if you are undocumented. (Click on diagram to enlarge.)
The above diagram reflects the attitude towards forced ranking of many organizations. Let’s reward the high performers and fire the low performers. There are many problems with this thinking not to exclude the items we have already discussed. The problem with getting rid of the low performers is that there will always be people at the top and bottom of any organization. Your organization hired and trained all types, at great expense I might add, and there is no guarantee that when you hire someone to replace a low performer they will be better than one you just got rid of from the organization.
I have a better solution. Rather than rewarding the performance of the high performers, why don’t we improve the performance of all people in the organization. It would take a huge improvement of the high performers to out perform a small improvement of all levels of performers (See figure three). This reflects a better way of thinking to improve performance.
More on a Better Way
Targets, rewards, incentives, performance appraisals and ranking are not going to drive profit into your organization. These approaches drive profit out of the organization by all the time and technology invested. And let’s not forget about the frustrated employees and wake of destruction these promote.
It was Frederick Herzberg that said, "If you want people to do a better job, give them a better job to do." The real issue that needs to be addressed is the poor design and management of work we have in our organizations. This will require new thinking in our approach.
If or when people learn these approaches are wrong, you may want to start by understanding your organization as a system. This is not a tools-based approach like TQM, Lean or Six Sigma as these approaches do little to change the thinking around the design and management of work. This is a thinking-based approach that requires the minds of all people in the system.