Pay-for-Performance is a Costly Tool

Pay-for-Performance is a Costly Tool

On creating value and managing accountability

Arm wrestle

An interesting topic of discussion came across my radar — I’ve framed it here as a question: what do you think of using performance incentives to motivate employees?

If you’re too lazy to read: I believe that periodic performance tied to cash compensation is misaligned with the long-term value creation.

My (Biased) Background

For the last two years I’ve been the president of a non-profit organization. This organization — an after-hours, service-oriented association — doesn’t have the resources to pay people for their contributions. Nada. Zilch.

I’ve personally committed more than a thousand hours to this organization (more than ten hours a week) with no financial gain, and the same goes for the people who’ve worked on my behalf. At the end of the day, all I can grant is the ability to participate in something bigger — and to develop oneself.

In the first few months this was a hard problem to grapple with. It made no sense to corporate-me: how can I get people to work for free? Two years later, still very much engaged in the corporate / startup world (I am the Director of Operations for a Healthcare IT business), I can’t stomach — much less imagine —compensating my direct reports with cash for a job well done.

My Mantra

Every day when I hit the pavement, I am focused on one thing: making everyone around me better. It’s simple, so please hear me out.

If everyone around me contributes more than 100% of their base performance every day, then as a team we will be more than the sum of our parts. I consider this to be the multiplication technique.

Certainly, it gets more nuanced than this. A few questions arise: are people exerting that additional effort overcoming communication barriers? Are people expending energy in duplicative ways? Are the people around me focused on the right work, etc.? I’ll touch on these here, but I want to save those topics for another day.

A Primer on My Management Strategy

(Or, why creative people enjoy working with me)

I have made many mistakes, and your bosses likely have too. Micro-management, lack of goal setting, and unclear expectations have each been a folly of mine. Due to scenery changes, I’ve had the privilege to overcome each of them. This is my trade-off for focusing on personal development over financial development. And, it informs my approach.

So what is my approach? I’ll boil it down to a set of rules — all of us operational people love frameworks and for those of you who aren’t process people, you can at least follow along.

  • change your focus from managing tasks to managing people
  • people yearn to grow, explore, and master
  • small mistakes and accountability are reflections of trust
  • the person doing the job is best informed of his or her needs
  • everything can be broken into tasks, and accountability depends on this
  • a short feedback loop informs capability, progress, and course correction
  • work-product is reportable, and reports lead to trajectory
  • trajectory over time maps to net direction and velocity
  • a managers role is to channel and grow velocity alongside the one, universal goal (corporate, social, or otherwise)

Every week, I work with my direct reports to take an appropriate set of defined tasks for the following week. In the truest form of accountability, ownership and responsibility is established: my input guides which work is picked-up (top-down goal alignment) and their job is to identify how much they can accomplish in the reporting period (in this example, a week).

During this same meeting, we review the last week’s worth of work, assess any miscommunication, and consider whether too-much or too-little was put on the plate.

I expect my reports to be the master of their work. When needed, they can and should call on me for help, but ultimately I believe that they’re best informed to make their day-to-day decisions.

And, perhaps most importantly, I rely on my team (especially when working on creative projects) to produce more backlogged tasks throughout the week. This informs me of whether the report is adequately engaged with the goals of the organization, and their degree of confidence in what they’re working on and how it relates to the big picture.

A trivial example

In a marketing role, I might work with a team member who picks up the following tasks:

  1. identify what our customers search for on Google
  2. assess which keywords best reflect our voice and identity
  3. create a list of articles to be written in the next month

And, of course there is a fourth task that is implied: 4. create new tasks based on the work from the previous three.

Here are some examples of backlogged tasks that might get created:

  • identify what keywords our competitors bid on
  • draft three articles from the list
  • build a performance tracking dashboard to monitor traffic to our articles
  • identify thought-leaders to engage with regarding these articles
  • understand what our customers aren’t searching for today but might in the future

Accountability and Purpose

Rather quickly in this ordeal (a matter of weeks) our needs and opportunities become clear. By engaging my team in tactical execution they become accountable to the greater strategy. The strategy does not need to be narrowly defined, because (an executable) strategy is ultimately defined by the capability of my team.

They inform me, and I inform them: trust is established. And more importantly, by coordinating smaller strategies, we begin to share a common purpose.

My strategy is multiplied by their strategy. When I’m another person in the food-cycle, my effort multiplies my boss’s effort. The effect is truly exponential.

This theory of management works because it relies on what naturally drives creative workers: autonomy, mastery, and purpose.

Misaligned Performance Incentives

On the flip side of all of this is financial incentive. What happens if we encourage people to produce more? To figure this out, we have to consider both approaches: that of objective measure for financial reward, and that of subjective measure for financial reward.

Objective measures

When a creative is driven to produce more, they sacrifice independence and thought in exchange for short-term compensation. This is at odds with value creation as it’s inherently a value-capture tool.

Cash, a powerful motivator with the likeness of sugar in Coca Cola, degrades the long-term focus on health for the immediate gluttony of now. Yes, cash incentives produce corporate diabetes.

Subjective measures

Well then, of course for creatives it makes sense to incentive based on subjective measures of goal-attainment. Right?

Ignoring the elephant in the room — fairness—this approach breaks a critical feedback loop: information on the ground informing strategy on the top. I can guarantee my team agrees with my strategy by paying them (or perhaps worse, withholding payment) unless they buy-in.

Breaking this feedback loop erodes trust and purpose. This occurs because the incentive informs the team on what tools to use, and how to do their job. Rather than steering the ship, we join them at the oars. This is the opposite of multiplication — it’s division.

Conclusion

Pushing financial incentives for creative work is indicative of a greater problem: accountability. If your team is not driven by autonomy, mastery, and purpose, then you either have the wrong people engaged or you’re wrongly engaging the people.

The benefits of purpose can be shown in math. If we assume three levels of hierarchy, and allow our team to push us further, we might get 5/4 our base performance (a 25% bump). 125% * 125% * 125% yields 2x base performance.

Alternatively, if we join our crew below deck to row the oars, we might achieve 4/5 our base performance (a 20% decrease). 80% * 80% * 80% yields 0.5x base performance.

In a world where better survives (faster, smarter, greater), it’s catastrophic to take the wrong approach.

Devin Fee

Devin Fee

http://devinfee.com

I'm a father, and engineer turned businessman. I have built my career in the world of early stage, venture backed businesses.

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