Nothing emits more emotion and discussion in my conversations and speeches than incentives and bonuses. My position is against them in that they cause waste, sub-optimize and drive the wrong behavior in individuals and managers. Most people politely listen, a few strongly agree and there are those that call me a communist, socialist or unAmerican. For the latter, my response is either "you mean . . . opposed to the dictatorship you have here" or "show me in the US Constitution or Bill of Rights, your right to bear bonuses and incentives."
Why is it that bonuses and incentives equate to "all things American" in some people? There are no democracies in business, they are run in dictatorship (command and control) style. No one votes for what project to do next, these are decisions by management. So why is it that this decision-making process is seen as American and a conversation against bonuses and incentives seen as unAmerican?
What do I have against bonuses and incentives? Let’s take an intellectual look:
- Bonuses and incentives sub-optimize. The focus is usually on an individual, department, team and group. AIG has brought this to the forefront: How does a company that loses billions pay out bonuses? They focus on the individual. Dr. W. Edwards Deming taught us that 95% of performance has to do with the system and 5% the individual (see Red Bead experiment). I recommend an understanding of variation is in order for any manager. So why do we focus so much on the individual? When it creates winners and losers and manipulation of the system to win.
- They become the de facto purpose. The purpose needs to be expressed in terms of serving customers and not . . . will I make my bonus. Be honest, it does cover up REAL purpose.
- Typically are accompanied by performance and financial targets. If I hit my individual (or group) financial and performance targets not only does it sub-optimize and set a defacto purpose, but lead to cheating and creation of waste. We also will never know with targets how well we could do with purpose-related measures. We stop when the target is hit.
- They drive out intrinsic motivation (Theory Y) in favor of extrinsic motivation (Theory X). Not all extrinsic motivation is bad . . . like pay. But if I doubled your pay, would I double your performance? The answer is "of course not" not unless the system changes (work design, enabling technology, policy, etc.) will I be able to improve performance. Bonuses can drive out our intrinsic nature to do better.