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Rethinking Rewards

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PERSPECTIVES What role - if any - shouldf incenfives play in the v^orlcplace? Rethinkinq Rewards It is difficult to overstate the ex- tent to which most managers-and the people who advise them-be- lieve in the redemptive power of rewards, AHie Kohn argues in "Why Incentive Plans Cannot Work" (September-October 1993). Certain- ly, the vast majority of U.S. corpora- tions usf some sort of program in- tended to motivate employees by tying compensation to one index of performance or another. But more striking is the rarely examined belief that people will do a better job if they have been promised some sort of incentive. This a.ssumption and the practices assoeiutt'd with it are pervasive, but a growing collection oi evidence supports an opposing view. Accord- ing to numerous studies in labora- tories, workplaces, classrooms, and other settings, rewards typically un- dermine the very processes they are intended to enhance. In Kohn's view, the findings suRsest that the failuro of any given incentive pro- gram is due less to a glitch in that program than to the inadequacy of the psychological assumptions that ground all such plans. Do rewards work? The answer de- pends on what we mean by "work." Research suggests that, by and large, rewards succeed at securing one thing only: temporary compliance. They do not create an enduring com- mitment to any value or aetion. They merely, and temporarily, change what we do. According to Kohn, incentives in the workplace simply can't work. Nine experts consider the role of rewards in the workplace. G. Bennett Stewart III Senior Partner Stern Stewart & Co. New York, New York A world without A's, praise, gold stars, or incentives? No thank you, Mr. Kohn. Communism was tried, and it didn't work. The Soviet and Chinese econo- mies collapsed because people were not allowed to share in the fruits of their individual efforts. With gains from persona! initiative harvested as a public good, innovation ceased, PHOTO BY TONY RINALDO 37
Transcript
Page 1: Rethinking Rewards

P E R S P E C T I V E S

What role - if any - shouldf incenfives play in the v^orlcplace?

Rethinkinq Rewards

It is difficult to overstate the ex-tent to which most managers-andthe people who advise them-be-lieve in the redemptive power ofrewards, AHie Kohn argues in "WhyIncentive Plans Cannot Work"(September-October 1993). Certain-ly, the vast majority of U.S. corpora-tions usf some sort of program in-tended to motivate employees bytying compensation to one index ofperformance or another. But morestriking is the rarely examined beliefthat people will do a better job ifthey have been promised some sortof incentive.

This a.ssumption and the practicesassoeiutt'd with it are pervasive, buta growing collection oi evidencesupports an opposing view. Accord-

ing to numerous studies in labora-tories, workplaces, classrooms, andother settings, rewards typically un-dermine the very processes they areintended to enhance. In Kohn'sview, the findings suRsest that thefailuro of any given incentive pro-gram is due less to a glitch in thatprogram than to the inadequacy ofthe psychological assumptions thatground all such plans.

Do rewards work? The answer de-pends on what we mean by "work."Research suggests that, by and large,rewards succeed at securing onething only: temporary compliance.They do not create an enduring com-mitment to any value or aetion.They merely, and temporarily,change what we do. According to

Kohn, incentives in the workplacesimply can't work.

Nine experts consider the role ofrewards in the workplace.

G. Bennett Stewart IIISenior PartnerStern Stewart & Co.New York, New York

A world without A's, praise, goldstars, or incentives? No thank you,Mr. Kohn. Communism was tried,and it didn't work.

The Soviet and Chinese econo-mies collapsed because people werenot allowed to share in the fruits oftheir individual efforts. With gainsfrom persona! initiative harvested asa public good, innovation ceased,

PHOTO BY TONY RINALDO 37

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P E R S P E C T I V E S

and productivity froze. "They pre-tend to pay us, and we pretend towork" was the Russian worker'slament for the system Kohn nowproposes. But for pay to mean any-thing, it must be linked to per-formance. Without that link, paybecomes nothing more than enti-tlement, a job nothing more thana sinecure.

Kohn is unhappy that rewardingsome people necessitates penaliz-ing others. Winston Churehill's aptaphorism is the hest response. Hesaid, "The virtue of communism isthe equal sharing of its misery, andthe vice of capitalism is the unequalsharing of its blessings." You can'thave it both ways, Mr. Kohn, Yousimply can't have the equality ofoutcome you desire with the robust,dynamic economy we all want.

Contrary to the small-sample psy-chology tests Kohn cites, the respon-siveness of ordinary citizens to in-centives is demonstrated daily inour economy. Consumers cut con-sumption in reaction to the "penal-ty" of a price increase and raise pur-chases in reaction to the "bribe" ofa lower price. The price system effi-ciently allocates scarce resourcesprecisely because it rewards peoplewho conserve and penalizes thosewho fail to respond. Can it be true,as Kohn seems to think, that peoplerespond to monetary incentiveswhen they spend their income butnot when they earn it;

If Kohn makes a useful point, it iswhen he says that people won't wantto be paid for doing specific tasks.But here is where we disagree: peo-ple should be rewarded for an overalljob done well. To put the point ineconomic terms, the best incentiveis having a pieee of the aetion. Com-pany stock, however, is not the bestapproach to instilling ownership, forit frequently leaves too loose a linkbetween pay and performance.

The best approach often is to carveemployees into a share of the profitcontributed by their part of the com-pany. Profit should be defined in rel-evant cash-flow terms after coveringthe cost of all capital employed, ameasure that Stern Stewart & Co.calls Economic Value Added. EVAprovides employees with three clear

38

incentives: tu uuprovc protitability,to grow profitability, and to with-draw resources from uneconomic ac-tivities. In addition, it ties their deci-sions and energies directly to the"net present value" of their enter-prise. All key managers at QuakerOats have been on an EVA sharingplan for several years, and ScottPaper Company introduced an EVAincentive program for all salariedemployees at the beginning of 1993,to name but 2 of the 50 prominentcompanies that have adopted thisapproach in recent years.

Eileen AppelbaumAssociate Research DirectorEconomic Policy InstituteWashington, D.C.

Companies today are under in-tense pressure to improve efficiency

"A worldwithout A's,praise, gold

stars, orincentives?

No thank you,Mr. Kohn.

Communismwas tried,

and it didn'twork/'

G. Bennett Stewart III

and quality at a time when their re-sources are severely limited. Fid-dling with compensation schemesappeals to many managers as a cheapway to improve their companies'perfonnance by providing individu-als with incentives to work harder.In fact, reliance on individual incen-tives to motivate workers and spurproductivity has a long history inthe United States. The U.S. human-resource model evolved in the 1950spartly in response to then-currenttheories of industrial psychology. Bydesigning compensation schemesthat recognize and reward individualdifferences, companies expected toreap the rewards of increased em-ployee motivation and improved jobperformance. This idea continues toinform present managerial thinking.In his article "Why hieentive PlansCannot Work," Alfic Kohn has per-formed an important service by mar-shaling the modern evidence on thepsychological effects of incentivesand by showing that rewards failto improve, and may even reduee,performance.

We arc still left, however, withquestions about what improves acompany's performance and whatrole compensation actually plays inthat improvement. I would offer thefollowing answers, based on an anal-ysis of nearly 200 academic casestudies and consultants' reports, car-ried out with Rosemary Ratt -a doc-toral candidate in labor relations andhuman-resource policy at MIT'sSloan School of Management-andpublished in The New AmericanWorkplace, forthcoming from theILR Press in 1994.

In the early part of the twentiethcentury, workplace innovations at-tempted to improve employee satis-faction and, at the same time, com-pany performance. In contrast, themove to high-performance work sys-tems since the mid-1980s is moti-vated hy the need to improve qualityand reduce costs simultaneously. Inthe mass-production model of workorganization, whether the Tayloristor the U.S. HR version, improvingquality raises costs-for inspection,supervision, rework, and waste. Itwas quite a shock to U.S. sensibili-ties, therefore, when Japanese auto

Page 3: Rethinking Rewards

P E R S P E C T I V E S

manufacturers demonstrated thatnew ways of organizing work coulddelivernotieeably higher quality andcustomer satisfaction at signifi-cantly lower prices. It took nearly adecade for companies in the UnitedStates to realize that they wouldhave to change.

Our review of the evidence indi-cates an acceleration of experimen-tation with innovative workplacepractices and the emergence sincethe mid-1980s of two distinctlyAmerican high-performance mod-els: a U.S. version of lean productionthat relies on employee involvementand a U.S. version of team produc-tion that relies on employee empow-erment for pcrformanee gains. Pro-ductivity and performance improvethe most when work is reorganizedso that employees have the training,opportunity, and authority to partic-ipate effectively in decision making;when they have assurances that theywill not be punished for expressingunpopular idcas; when they realizethat they will not lose their jobs as aresult of contributing their knowl-edge to improve productivity; andwhen they know that they will re-ceive a fair share of any performancegams, assurances which unionizedworkers in high-performance com-panies eniny.

Attempts to improve performanceby manipulating compensationpackages have proven counterpro-ductive. However, reorganizing thework process to capitalize on em-ployee skills and participation hasimproved performance, especially incnnihination with employment se-ciiriiy, gain.shiiriiig, and incentivesto take part in training. In this sense,then, compensation packages are animportant component of the human-rcstiurcc practices that are neces-sary to support high-performancework systems.

vatitm and organizatidnal effective-ness. But because certain practicalconsiderations and cultural differ-ences arc not addressed, the argu-ment is flawed.

Like Kohn, I have found that manymanagers in the United States andthe United Kingdom-hut not, inci-dentally, in continental Europe orJapan-have deeply held assump-tions about the role of incentive payin motivation. These assumptionslead them to engage compensationconsultants in answering the wrongquestion: How should we design theincentive system in order to obtainthe desired behavior? The more im-portant question is: What role, ifany, should incentive compensationplay? Like Kohn, I have found thatassumptions about ineentive com-pensation have led many managersto expect incentives to solve organi-

Michael BeetProfessor of BusinessAdministrationHarvard Business SchoolBoston, Massachusetts

Kohn has mounted an eloquent ar-gument, when it is considered inlight of what we know about moti-

''If incentivesystems do notmotivate, what

shouldmanagers do

ahoutcompensation?Surely, Kohn

would notsuggest that

everyoneshould he paid

the same."Michael Beer

zational pruhlem.s, when there areactually deeper underlying reasonsfor those prohlems.

Managers tend to use compensa-tion as a crutch. After all, it is fareasier to design an incentive systemthat will do management's workthan it is to articulate a directionpersuasively, develop agreementabout goals and problems, and con-front difficulties when they arise,The half-life of an incentive systemis at best five years. When it stopspaying off, employees turn againstit. And the result is another dysfunc-tional by-product of incentive sys-tems: precious attention, time, andmoney is expended on endless de-bates about and redesigns of the in-centive system.

If incentive systems do not mo-tivate, what should managers doabout compensation? Surely, Kohnwould not suggest that everyoneshould be paid the same. In someindustries or functions-sales, forexample-incentive compensationis the prevailing practice. In theseareas, without paying for perfor-mance, an organization will lose itsbest people. Yet by paying for perfor-mance, the company rims the dan-ger of encouraging self interest in-stead of organizational commitment.This is a fundamental pay-for-per-formance dilemma that practicingmanagers confront and that Kohnneglects to address.

It is undoubtedly true that in to-day's competitive environment, in-terdependence between differentbusiness units and functions as wellas the need for custtnner service andquality make incentive compensa-tion less appropriate than it oncewas. But there are circumstances inwhich it is the only solution avail-able: for example, managers of inde-pendent stores far from headquar-ters who don't have a motivatingmanager-subordinate relationship orsalespeople whose performance isindependent of other business unitsand who operate without supervisionmuch of the time.

Managers who agree with Kohnshould pay for performance butstrive to use incentive systems as lit-tle as possible. Pay is an exercise in

continued on page 42

39

Page 4: Rethinking Rewards

smoke and mirrors. Companies can-not stop paying for performance.However, they should avoid usingincentives for all the reasons thatKohn suggests.

What can managers do? Theyshould focus on paying people equi-tably, rather than using pay as aninstrument of motivation. Theyshould avoid coupling pay with year-ly or quarterly performance, whilepromoting the top 10% or 15% ofemployees for outstanding long-term contributions. The poorestperformers should be weeded out,while the rest should be praised forgood performance and recognizedthrough other means to promoteself-esteem.

We are indebted to Kohn for ring-ing the alarm, but he does notprovide managers with creative,practical solutions to the pay-for-performance dilemma.

Andrew M. LebbySenior PartnerThe Performance GroupWashington, D,C.

The effect of rewards on motiva-tion and performance is one of themost studied subjects in the man-agement literature. Year after yearwe validate the finding that employ-ees' perceptions of underpay resultin decreased productivity, while in-creased pay doesn't result in in-creased productivity. Year after yearwe ask employees what motivatesthem, and year after year they reply:a sense of accomplishment in per-forming the work itself, recognitionfrom peers and top management, ca-reer advancement, managementsupport, and, only then, salary.

If Kohn is unable to find data thatsupport anything but a negative rela-tionship between financial incen-tives and performance, why is it thatin the face of overwhelming evi-dence executives continue to holdonto ineffective methods; Why is itthat they refuse to provide thosethings that employees say theywant, that directly relate to in-creased productivity, and that havelittle or no financial cost?

When we stop to separate thephysical nature of the reward it-

i''IntrinsicLOtivation-

beingmotivated bycballenge andenjoyment-is

essential tocreativity. But

extrinsicmotivation-

beingmotivated by

recognition andmoney-doesn't

necessarilyburt/ '

Teresa M. Amabile

self from what the recipient findsrewarding, some possible answersappear. When we ask employees,"What was tbe last reward you re-ceived?" the most frequent responseis some variant of "money." Whenwe ask, "Wbat did you find reward-ing about money?" the most fre-quent response is that it was a tacitacknowledgment of the outstandingnature of their contribution. Just asit is easier for some parents to showlove with gifts tban with hugs, it isoften easier for organizations andmanagers to show gratitude witbmoney than with words.

Our current notions of pay follownaturally from our antiquated, Tay-lorist, mechanistic models for de-signing work. The work we do andhow we do it have shifted signifi-cantly, but our reward and salarystructures remain essentially the

same. Senior managers will end ii-nancial incentives only when theyrethink what work is and how it isperformed. Organizations that haveredesigned work to reflect cross-functional business processes ortbose tbat bave implemented theactual principles of TQM bave hadto rethink pay and performance.Employees have said, "Give us thetools, tbe skills, the information, thesupport, and thc respect we need."In different words, "Give us realcapital, intellectual capital, andsymbolic capital, and we'll increaseyour-and our-financial capital,"

Money is an outcome of bigh per-formance. Satisfaction and respectare incentives to it.

Teresa M. AmabileProfessor of PsychologyBrandeis UniversityWaltbam, Massachusetts

Kohn is absolutely right when hetells us that rewards can workagainst real commitment and ere-ativity. But he doesn't tell the wholestory. There are important differ-ences between bribes and equitablecompensation, and tbcrc are condi-tions under wbicb rewards can in-crease involvement and creativity.What matters is what those rewardsactually mean.

As Kohn points out, there is abun-dant evidence tbat interest and per-formance decline over the long runwhen people feel they are controlledby incentive systems or any othermanagement system. What Kohnfails to point out is that people donot always feel controlled by re-wards. In a recent study of profes-sional artists, my students and Ifound, as Kohn would bave predict-ed, that noncommissioned workswere more creative than commis-sioned works. However, what mat-tered was not the obvious fact ofcontracting for reward, but tbe de-gree to which the artist felt eon-strained by the terms of the commis-sion; tbe more constraints, the lowerthe creativity. In fact, some artistsconsidered some of their commis-sions enabling, allowing tbem tocreate an interesting work of art tbatthey wouldn't otherwise have had

42 HARVARD BUSINESS REVIEW November-December 1993

Page 5: Rethinking Rewards

the means to do. When the rewardpresented the artist with new possi-bilities, in other words, creativityactually increased.

Intrinsic motivation-being moti-vated by challenge and enjoyment-is essential to creativity. But extrin-sic motivation-heing motivated byrecognition and moncy-doesn't nec-essarily hurt. Tbe most creativeartists in our study tended to be mo-tivated more by cballenge, but tbeyalso tended to be motivated hyrecognition, Kobn accurately docu-ments the evidence tbat rewards canundermine creativity. But he fails tomention tbe evidence tbat tangiblerewards can actually enbance cre-ativity under certain circumstances,most notably wben tbe individual'sprimary focus is on tbe intrinsic re-ward of the work itself.

Bribes, as Kohn frequently notes,are hound to make people feel con-trolled, and he rightly points outtheir negative effect on people'swork. But he implicitly includessalary in tbe same category as bribeswben be argues that "pay is notd motivator." Certainly, there aresome circumstances under whichsalary increases arc perceived ashrihes. A few years ago, for example,I interviewed an R&D scientist whowas widely considered to he one ofthe three most important innovatorsin a large, sueeessful eompany; bewas also considered extremely ec-centric, "They offered me a prettylarge salary increase this year, butI refused it," be recounted. "Rightnow, my lab is my playground; Ipretty much come in here and dothings the way I want. But the morethey pay you, the more they thinkthey own you."

A mucb more common reaction,however, was the feelinj; expressedby other scientists that their salaryincreases recognized tbeir creativecontributions. Generous compensa-tion, including companywide profitsbaring, need not be seen as a bribe,particularly when it is presented astbe equitable outcome of creativecompetence.

Although Kohn's article is clearabout what managers should avoid,it bas little to .say about alternativesto incentives. Tbere is mueb tbat

''Appropriaterewards forimproved

performancehave alwaysmade good

sense,intuitively and

practically.Tbey aren't

wrong.Tbey aren'tintrinsically

demotivating."Jerry McAdanis

can be said about redesigning workand tbe work environment so thatextrinsic motivators become lesscentral. Managers need to know howto use these alternative techniquesbefore they can be expected to aban-don tbe ineentive systems on wbichthey have relied for so long.

If Kohn can convince even a fewmanagers that incentive plans arenot the keys to innovative, high-quality performanee, he will bavemade a significant contribution. Butit would he a mistake to helieve thatreward and recognition must alwayshave a negative effeet on perfor-mance or that ereative people can-not be motivated by both money andinterest in the work itself. As tbepoet Anne Sexton once said, "I am inlove with money, so don't be mistak-en. But first I want to write goodpoems. After that, I am anxious as

hull to earn money and tame andbring the stars all down."

Jerry McAdamsVice President, PerformanceImprovement ResourcesMaritz Inc.DirectorConsortium for Alternative RewardStrategies ResearchSt. Louis, Missouri

A few years ago, Kobn did thebusiness community a service withhis book. No Contest: The CaneAgainst Competition, which arguesthat competition is for the market-place rather than the workplace.The book makes a compelling ar-gument for focusing on teamworkinstead of pitting one employeeagainst another. The key to success,Kohn maintains, is to create an at-mosphere of cooperation, channel-ing employees' creativity and energyto affect the business objectives ofthe organization positively. Compe-tition between individuals, on theother hand, only gets in the way.

Now Kobn argues that rewards getin the way as well. On the basis ofmy 20 years of researcb inj; and de-signing reward plans for sales andnonsales employees, I disagree. Ap-propriate rewards for improved per-formance bave always made goodsense, intuitively and practically.They aren't wrong. They aren't in-trinsically demotivating. Data showthey make good husiness sense.

Of eourse, tbere is always a mar-ket for speeches, books, and articlestbat profess, through highly selec-tive academic research, that what isworking really isn 't. Kohn's article isa provocative exercise in attention-getting, niche marketing. Unfortu-nately, Kobn's article will probablybe used by some to deny perfor-mance-improvement opportunities.

I do agree witb Kohn's point re-garding the negative aspects of thereinforcement of tasks, particularlywhen the reinforcement plan ispiece-rate or merit-pay based. Mea-suring and rewarding on an individu-al level (sales excepted) does tendto become controlling. The focusshould be on business objectives,not tasks. The study, Capitalizing

HARVARD BUSINESS REVIEW November-December 1993 43

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P E R S P E C T I V E S

on Human Assets, covering one-mil-lion employees and 432 compensa-tion plans and sponsored by tbe non-profit Consortium for AlternativeReward Strategies Research (CARS),shows that rewarding groups of em-ployees, usually wbole plants and of-fices, is a powerful husiness strategy.According to the study, this strat-egy pays off a median three-to-onereturn on the cost of the rewards.Employees earn from 2% to 15% oftbeir base pay in incentives or non-cash awards. No layoffs appear toresult from the improved perfor-mance. Interviews and extensive da-ta analysis of tbe 432 plans showpositive employee-management co-operation and improved informationsharing and employee involvement.

Rewards are not bribes. Bribes arepayments for behavior that may bein the organization's best interestbut are clearly not in the individ-ual's. Rewards reinforce a "win-win" environment. Tbe objective ofa reward plan is not to "control ormanipulate," as Kobn contends. It isto provide foeus and reward im-proved performance.

Tom Peters was right wben hewrote about Kobn's thesis, "Whatwe need is a lot more positive rein-forcement, and a lot less of the nega-tive kind, throughout the corporatelandscape. And far from cautioningcompanies about the dangers of in-centives, we should be applaudingthose tbat offer their employees abigger piece of the action" (INC,April 1988). The CARS researeh hasdone just tbat, looking at more plansin greater depth than any otherstudy. The bottom line is simple:reward plans work when properly de-signed and supported; there can besomething in it for everyone,

I tbink it is time to foeus on theproductive use of people as assets tobusiness not on the counterproduc-tive theories in Kohn's artiele.

L. Dennis KozlowskiChairman and CEOTyco Laboratories, Ine,Exeter, New Hampsbire

I'll accept that elephants cannotfly and that fish cannot walk, hutKohn's argument that incentive

plans cannot work cieties thc laws ofnature at Tyco Laboratories. Tycoprovides a compelling ease studythat incentives can and do work forboth managers and shareholders. Infact, we believe our incentive com-pensation program is at tbe heart ofour company's success.

We view tbe relationship betweenTyco's management and its share-holders as very straightforward:management works for the share-holders. It is our mission to createvalue for them through stock-priceappreciation. In fact, our share pricehas closely tracked our earningscurve for many years, lending con-siderable weight to our determina-tion to encourage earnings growth ina prudent and consistent manner.Our compensation program, in turn,was designed to align the financialinterests of our executives with

'TU accept thatelephants

cannot fly andthat fish cannot

walk, butKohn's

argument thatincentive plans

cannot workdefies the laws

of nature atTyco

Laboratories/'L. Dennis Kozlowski

those of our shareholders. Tbe basicrule is tbis: thc more the executivesearn for the shareholders, the morethey earn for themselves.

Tyco's 250 profit centers fall intofour major businesses. Witbin thecontext of a few corporate financialcontrols, we tell each profit-centermanager to run the business as if beor she owned it. A decentralized ap-proach lets us put the financial re-sources of a $3-billion corporationbehind tbe entrepreneurial spirit,drive, and resourcefulness of man-agers wbo tbink and act like owners.It's the best of both worlds. Profit-center autonomy and responsibilitygo hand in hand. We encourage eachunit's management team to sharethe unit's profits, Tbe more profitsthe business unit earns for thc share-holders, the more compensation themanagement team earns for itself.

Our incentive plan has several im-portant and unique features. For one,incentive compensation is directlytied to each business unit's perfor-mance and not to corporate resultsor otber factors beyond any individ-ual's control. In addition, tbe awardsare not based on bow units performagainst a budget or any other presetgoal. Instead, awards eonstitute apreestablished percentage of earn-ings. Since we adopted this ap-proach, the quality of the budgetingprocess bas substantially improved.Finally, award opportunities are un-eapped, and, as a result, they encour-age the entrepreneurial spirit thatwe value.

When designed effectively andintegrated thoroughly into the man-agement process, executive incen-tive programs work well for manage-ment and shareholders alike.

George F. Baker IIIAssociate ProfessorHarvard Business SchoolBoston, Massachusetts

The problem is not that incentivescan't work but that they work all toowell. Kohn's analysis of the unin-tended and unwanted side effects ofmany incentive plans is perfectlyapt; plans that provide incentives fortbe wrong bebavior will produce thewrong results. However, Kohn's so-

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lution to abandon incentive plansentirely is misguided. Ratber, man-agers must learn bow to harness anduse the power of incentives to driveindividual motivation and organiza-tional effectiveness.

In several places, Kohn's asser-tions about the weakness of incen-tive plans only serve to bighligbt tbepower of sueh plans to influence be-havior. What Kohn says is absolute-ly true: if teamwork and cooperationare desired, and the incentive planrewards only individual results, thentbe plan will generate counterpro-ductive results. However, a well-de-signed ineentive plan that rewardsteam produetivity not only willavoid such unproductive behaviorbut also will induce employee coop-eration. This is the logical basis forthe majority of profit-sharing andemployee stock-ownership plans,whose effectiveness mounting evi-dence supports.

Similarly, Kobn's observation thatincentive plans cause employees tocurry favor with the boss and with-hold information about poor perfor-mance is often accurate. But tbe so-lution is not to eliminate the boss'sability to reward employees. Instead,supervisors sbould be trained to ig-nore or punish politicking. It is pre-cisely because incentives are sopowerful that Kohn can predict thatif managers reward politicking, poli-ticking will result.

Reward plans need not be control-ling, as Kohn seems to imply. Con-sider tbe store-manager incentiveplan at Au Bon Pain. Store managersare given a profitability target andare allowed to keep a substantialfraction of any profits they earnahove tbis target. The chain puts fewconstraints on how they achieve orexceed their targets. Tbe plan hashardly been "the enemy of explo-ration." Rather, it has resulted in anexplosion of entrepreneurial experi-mentation and innovation. Notice,b<jwever, that the Au Bon Pain planis not, in Kobn's words, "contingenton bebavior." It is contingent on re-sults, and herein lies the crucial dif-ference. Plans that are contingent onhehavior will encourage the pre-serihed behavior and stifle initia-tion. However, plans that reward de-

sired results are likely to stimulateinnovation.

Perhaps tbe most disturbing omis-sion from Kobn's article is his failureto suggest an alternative to the useof incentive plans. If companies areto abandon extrinsic incentives as away to motivate employees, wbatare tbey to use instead; Is Kobn rec-ommending that we live with theloss of individual motivation andlack of organizational innovationand flexibility that characterizescompanies and societies without ex-trinsic incentives? Without somelevel of extrinsic incentive to sup-plement the intrinsic drive of indi-viduals, organizations become un-wieldy and inflexible. As a generalprescription for tbe management oforganizations, Kobn's approach isnaive and Utopian. In tbe real world,organizations must manage incen-

tives if they arc to be flexible, inno-vative, and directed.

"Incentives areneither all good

nor all bad.Although not

the rightanswer in all

cases, they canbe highlyeffective

motivationaltools."

Donita S. Wolters

Donita S. WoltersManager of Human ResourcesIMM Operational Services, Ine.Denver, Colorado

While Kohn makes a numher ofvalid points with respect to the dan-gers of incentive plans, his summaryexecution of incentives is unwar-ranted. Incentives are neither allgood nor all had, Altbougb not theright answer in all cases, they can behighly effective motivational toolsand should be employed under tbeappropriate circumstances.

Witbout a doubt, finaneial re-wards can be, and bave been, bothoverused and misused. Implement-ing a poorly designed or ill-suitedincentive plan can do more harmthan good because employees willinevitably receive mixed, even con-flicting, messages from tbe organiza-tion ahout its values and priorities,leading to confusion and frustration.Incentives are no substitute for goodmanagement and sbould not be usedindiscriminately to remedy prob-lems wben more effective solutionsexist. Kohn mentions training andgoal setting as examples of effec-tive strategies for improving produc-tivity, and his advice is well-taken.Incentives cannot improve perfor-mance if employees are not properlytrained to perform tbeir tasks orbave no idea wbat is expected ofthem. But something more is of-ten needed to elicit thc necessaryeffort. The job-rate pay systems thattypify unionized blue-collar environ-ments-where mediocrity and lackof innovation are tbe hallmarks,and employees do just enougb toget by - illustrate the point.

I have observed, as a veteran ofmany employee-counseling ses-sions, that employees are more aptto become disillusioned with incen-tive plans when they feel exploitedbecause the expected rewards arenot forthcoming, not when they arerewarded for something they wereinclined to do in the first place. Toavoid pereeptions of exploitationand manipulation, however, two de-

continued on page 48

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sign features of the incentive pro-gram are imperative.

First, the criteria for and the actualevaluation of performance must beseen as objective and witbin the per-former's control. This means tbatanyone should be able to predict thereward consistently and reliablybased on given actions and results.The reward should not be deter-mined through bighly subjective

processes, such as a supervisor's in-dividual opinion, Kohn seems tosupport this view when he statesthat "not receiving a reward one hadexpected to receive is...indistin-guishable from being punished."

Second, tbe recipient should con-sider the reward equal to the efforttbat produeed it. Too insignificantand the incentive will be insultingand tbus ineffective; overdone and

the balance of fairness will be upset.Insuffieient attention to these dy-namics may underlie the apparentfailure of many executive incentiveplans, wbich could more accuratelybe termed entitlement programs.

Kohn goes on to decry the inabili-ty of incentives to "create an endur-ing commitment to any value or ac-tion," I question the relevance ofthis criticism. The purpose of incen-

Alfie Kohn Responds:Tbe average U.S. company has

come to resemble a game show:"Tell our employees about thefabulous prizes we bave for themif their productivity improves!"None of my respondents doubtstbe pervasiveness of tbis men-tality. In fact, several professincredulity that anyone wouldquestion the value of danglingrewards in front of people. In myexperience, this reaction mostoften comes from the consultantswho make tbeir living sellingincentive programs. Wbat I heararound tbe country from peoplewith no axe to grind is a frankaeknowledgment that incentiveplans rarely work.

Consider the following:D A human-resource executive ata major U.S. auto company re-cently surveyed ber colleagues invarious industries; tbey told herthat, at best, tbeir incentive plansdidn't do too much damage.D Training Magazine ran a coverstory in August: "Why No OneLikes Your Incentive Program."D As Michael Beer observes, pay-for-performance programs aretypically tossed out a few yearsafter they are begun,D To tbe best of my knowledge,no controlled study has everfound long-term improvement inthe quality of performance as aresult of extrinsic rewards.

Of course, it is comforting tobelieve that incentives fail on-ly for incidental reasons, suchas that they are "misused," as

Donita Wolters would have it, ortbat they are offered "for thewrong behavior," as George Bakerclaims. But I believe incentiveplans must fail, because they arebased on a patently inadequatetbeory of motivation. Trying toundo tbe damage by adopting anew pay-for-performance sebemeis rather like trying to cure alco-holism by switching from vodkato gin. This argument makes a lotof people angry, as seems clearfrom lerry McAdam's unpleasantspeculations about my ulterior

for-performanee in particular.Neither can produce quality, butonly tbe latter is positjvely harm-ful, I agree with Amabile tbat"generous compensation,..neednot be seen as a bribe," but I dis-agree that "people do not alwaysfeel controlled by rewards."Richard Ryan and his colleaguesat the University of Rochester, pi-oneers in researching tbis ques-tion, bave concluded that "re-wards in general appear to bave acontrolling significance to someextent and thus in general run tbe

motives and from the amusing, ifpredictable, mutterings aboutcommunism hy G. Bennett Stew-art. If tbe attachment to earrot-and-stick psychology - or anydogma-is deep enough, ques-tioning simply isn't permitted.

W. Edwards Deming, and oth-ers before bim, have been tellingus for years tbat money is not amotivator. Judging from TeresaAmabile's response, however, Imay not have been clear enougbabout the difference betweencompensation in general and pay-

risk of undermining intrinsic mo-tivation." Offering good things topeople on thc contlition that theydo what you tell them is, almostby definition, a way of trying toexert control.

But even someone who insiststhat it's possible in tbeory to de-vise a noncontrolling reward basto concede that control is whatineentive plans in tbe real worldare all about. Just listen to the de-fenders of these programs: thewhole idea is to "direet [employ-ees'] behavior," as Wolters says.

48 DRAWING BY MARK STEELE

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tives is not to change employees'values but to direct their behavior inways that will benefit the organiza-tion and the employees themselves.More telling is Kohn's failure toidentify a viable alternative to in-centives. Of course, the intrinsic re-wards he praises are extremely moti-vating wbere they happen to exist,hut they are not always present andcannot usually be created.

The current trend in organizationsis toward less hierarchy and moreteamwork. For employees, thismeans that fewer promotions areavailable and greater eooperationamong coworkers is required. Foremployers, this means that maxi-mum versatility and produetivitymust be summoned from all mem-bers. The use of incentive plans rep-resents one strategy for aligning or-

ganizational and individual goals bytreating employees as partners inboth the risks and the successes ofthe business. Kohn recognizes thatthe majority of companies in tbeUnited States utilize some sort of in-centive plan. Indeed, bis assertionsare being tested on the firing line anddisproved by a persuasive cross sec-tion of U.S. business. _ ^Reprint 93610

1 believe incentive plans must fail.No wonder the evidence showsthat incentives do not "supple-ment tbe intrinsic drive of indi-viduals," as Baker believes, buttend to supplant it. As a rule, tbemore salient the extrinsic moti-vator, the more intrinsic motiva-tion evaporates.

One could say, as Baker does,that incentives work too well, inthe sense that they are destruc-tive of excellence and interest.But one cannot conclude fromthis that tbe problem is merelyone of implementation. Baker

behavior. Rather, the use of re-wards and the extrinsic orienta-tion tbey produee inexorably leadpeople to focus on pleasuig thosein charge of handing out the good-ies. Fine-tuning the incentiveplan cannot solve the problem.

Finally, a number of correspon-dents are understandably curiousabout my views on wbat shouldreplace incentive plans. If a dis-cussion on this point was con-spicuously absent from tbe arti-cle, which was an excerpt frommy book Punished hy Rewards, it

errs in assuming that just becauserewards undermine cooperationit follows tbat they can also cre-ate it. If something has the powerto hurt, that doesn't mean moreof it will motivate. Again, thinkof money: less of it can demoti-vate, but that doesn't mean thatmore of it will motivate. I thinkBaker also misunderstands wbyemployees try so hard to con-vince tbeir reward-dispensing su-pervisors that everything is undereontrol. It's not because the latterare deliberately rewarding such

was due to limited space. I dograpple at length witb alterna-tives to ineentives in anotherchapter, "Thank Cod It's Mon-day." Here, a few words will baveto suffice.

On compensation, my advice isthis: pay people well and fairly,then do everything possible tobelp them forget about money. Ibave no objection to profit-shar-ing: it seems sensible enough thatthe people who made the profitought to have it. Nor am I keen topromote one criterion for com-

pensation over another: for exam-ple, need, seniority, job responsi-bilities, training, market value.My concern is primarily to con-vince managers to stop manipu-lating employees witb rewardsand punishments and to stoppushing money into their faces.

My other concern is to empha-size the futility of fiddling withcompensation schemes. Tbis isnot the road to quality, AndrewLebby, a consultant, and EileenAppelbaum, a researcher, eorrob-orate this, and each offers a wayof thinking about where excel-lence aetually comes from. I findit useful to think in terms of threeC's: choice, collaboration, andcontent. Choice means that em-ployees should be ahle to partici-pate in making decisions aboutwbat tbey do every day. Collabo-ration denotes tbe need to struc-ture teams in order to facilitate anexebange of ideas and a climate ofsupport. Content refers to wbatpeople are asked to do: as Freder-iek Herzberg said, "If you wantpeople motivated to do a good job,give them a good job to do."

An organization that providesthese three ingredients in place ofartificial inducements like incen-tive plans will not "lose its bestpeople," as Beer worries. Inno-vation and excellence are thenatural results of helping peopleexpt-ricnee intrinsic motivation.But intrinsic motivation cannotsurvive in an organization tbattreats its employees like pets.

HARVARD BUSINESS REVIEW November-December 1993 49

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