Financial Rewards & Poorer Performance

I like the message in this post by Johanna Rothman on Hiring Technical People. Johanna voices her disagreement with something said to her at a conference:

“I don’t think people have the same passion about their jobs. They just want more money.”

Johanna goes on to say:

I, of course, disagreed. The reasons people want money is that organizations have broken the implicit social contract to be fair with their employees […] That means there is strictly a financial contract between the employee and the organization.

There is, however, even more to this topic that I’d like to share.

The Business Incentive

There is a business incentive to paying more per employee that gets hidden by typical “per-unit” cost-budgetting.

Chapter 2 of Dan Pink’s book “Drive” references research (funded by the United States Federal Reserve Bank) that showed that monetary incentives for cognitive tasks will actually have the opposite of the desired effect – perhaps because cognitive capacity is wasted on thinking about what happens if the criteria for the financial incentive are met/not met.

So, financial incentives actually result in poorer performance for cognitive tasks.

Instead, Dan recommends paying enough that money just isn’t something that the employee ever thinks about. This frees up cognitive capacity to focus on the work at hand – thus increasing performance.

As a result, the total output of fewer employees who are paid more can be greater than having more employees who are paid less. This assumes that all the people in these two situations are of comparable levels of talent.

Add to this the fact that a company that does this will not only attract and retain the best talent, the performance gains through increasing the organisation’s “talent-density” can be even greater!

Even if your total salaries budget was the same in both cases and you just had fewer employees, each paid more but delivering the same as the scenario with the larger number of employees – there are still savings to be made on accommodation costs, management overheads etc.

Understanding Drive & Motivation

In Part Two of Drive, Dan Pink explains the three elements of motivation:

  • Autonomy
  • Mastery
  • Purpose

Many of Johanna’s suggestions mostly fall into the “Mastery” category – conferences, book-allowance, etc. Some of her suggestions imply autonomy  – such as more flexibility in working hours and holiday/vacation.

A great example of this is Netflix. They started with old-fashioned holiday limits, but eventually…

…some employees recognised that this arrangement was at odds with how they really did their jobs. After all, they were responding to emails on weekends, they were solving problems online at home at night. […]

Since Netflix wasn’t tracking how many hours people were logging each work day, these employees wondered, why should it track how many holidays people were taking each work year?

From the Telegraph Newspaper

Netflix no longer tracks holiday time taken by their employees. Despite this, Netflix offices aren’t deserted with everyone on a permanent holiday and its people have made Netflix so successful that they (arguably) played a role in driving a much larger, more well established provider of blockbuster movie rentals to bankruptcy.

Dan delivers some compelling arguments that motivation and getting the best performance from people comes from giving people autonomy, the opportunity to master what they do and a clear purpose (beyond just making a profit for their employer).

Choosing the right incentives

We can take Dan’s “Three Elements” to inspire ideas about what incentives will motivate our people. Or, we can take these ideas completely to heart.

Rather than telling our employees that they have a book allowance and a conference/workshop budget and so on, we could simply give individuals (or teams) a “Mastery” budget and give them autonomy in how they spend it. Or, we could just pay it directly to the employees (like many companies do with a car allowance) and trust that they’ll spend it wisely.

Realistically, there may be taxation benefits to not giving the money directly to the employees. It may also offer more flexibility, say if a team, wanted to combine some of their budget for coaching or bringing a trainer in-house rather than individually going on the same public course.

The biggest fear some will have is that employees will abuse this freedom. If this happens, we can consider the misspent cash as an investment in discovering the people in our company who we might not want in our company anymore.

Some may argue that this is too much of a risk, but you know what they say… the greater the risk, the greater the rewards.

Many of the things I mention in this post can be heard in Dan Pink’s 10 minute talk on “Drive”…