Thursday, June 05, 2008

Creating the Right Incentives

My general rules of thumb when it comes to compensation systems are that they should be 1. simple and 2. a reflection of the value an individual and team contributes to the company (value being evidenced and as paid out as, as close to a reflection of actual profitability as possible). The goal of the latter being that I'd like my colleagues to consider how we can build a better company and for them to think that by doing so, they'll be compensated for it.

Of course, that's much easier said than done. And in recent years, I've also increasingly noticed that the better the culture is in a firm, the less #2 needs to be true (ie in econ speak, people are willing to trade off being paid better with being happier at work and as their employers take advantage of this presuming that productivity levels could be even better at such firms which seems ironic on a few levels).

In any event, I've recently discovered the blog Fistful of Talent via Incentive Intelligence. A recent post talks about the dangers of giving employees what they want when it comes to incentives:

The point being is companies own the program, and the results. Simply giving employees what they say they want is irresponsible. Ask any employee - what would you rather have a crystal trophy or $100 in cash. I'm betting the cash wins. Of course it does. It would be insane to say otherwise. However, the trophy drives a much different response than the cash. The response you want. It binds the employee on a social level. The cash (or near cash in the case of debit cards and gift cards) binds them at a transactional level. These types of awards create mercenary behavior. Plus recognition and non-cash awards don't have the same inflationary constraints that cash and cash-like awards have. Being appreciative and showing it isn't indexed to the CPI.
It's a good reminder that we shouldn't be as focused on monetary compensation though I still believe that the best way to retain someone is to ensure that they have the tools and environment available to them such that they are best able to create value with us more than they could elsewhere or on their own.


2of6 said...

I too agree that providing tools and the appropriate environment are important. But I think that will only provide a strong foundation for continuing the status quo and helping with retention.

When a company needs to shift focus and change behaviors - the incentives come into play.

Clement Wan said...

Thanks Paul for dropping by. You're right - I guess the idealist in me wants to believe that if people are rewarded based on the value they create then great managers have a responsibility to convince them that the change in focus and change in behaviours will result in greater value longer term for both the organization overall and for them specifically.

Of course, I don't doubt that at times people need a bigger (and hopefully temporary) nudge in the right direction not to mention. And then as has been pointed out to me by another manager this week, I tend to want to use carrots too much rather than sticks and that sometimes if people aren't performing their basic responsibilities they should be reminded of it.

Sorry I didn't get a chance to respond to your comment earlier as I was behind the great firewall of China and wasn't able to read your comment.

Best regards,