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Wednesday, October 22, 2008

You Get What You Pay For: Designing Incentive Compensation Plans

While I'm not currently working in that area, I try to keep on on topics related to compensation design and effects. One of the ongoing themes of this literature is that a program designed to incent employees to do one thing often has unintended consequences. As an example, the Unknown Wife put me through grad school working for a cell phone company. At one point, she was a commission auditor - the job was important because salespeople often tried to make their quotas by miscoding things rather than by just selling more (I'm shocked! Shocked, I say!). So, they needed people like her to check everyone's sales.

There's a great piece on this topic by Joel Sposky in Inc magazine.. Here's a choice snippet:
I'm always on the lookout for these incentive schemes gone wrong. There's a great book on the subject by Harvard Business School professor Robert Austin -- Measuring and Managing Performance in Organizations. The book's central thesis is fairly simple: When you try to measure people's performance, you have to take into account how they are going to react. Inevitably, people will figure out how to get the number you want at the expense of what you are not measuring, including things you can't measure, such as morale and customer goodwill.

...His point is that incentive plans based on measuring performance always backfire. Not sometimes. Always. What you measure is inevitably a proxy for the outcome you want, and even though you may think that all you have to do is tweak the incentives to boost sales, you can't. It's not going to work. Because people have brains and are endlessly creative when it comes to improving their personal well-being at everyone else's expense.
He's got some great examples illustrating this point. Read the whole thing here.

HT: Craig Newmark

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