Should Metrics (KPI) Be Linked to Remuneration?

Should Metrics (KPI) Be Linked to Remuneration?

Helping business leaders to identify the right metrics (key performance indicators) is a core part of my business coaching practice.

Metrics are used to measure the critical success factors that drive your current business model; the things you do every day to create leads, make sales, provide your products and services, keep your customers happy, grow cash and make profits. I call this stuff “Business As Usual”.  Here’s an article I wrote on The Benefits of Having the Right Metrics.

(Note: I use the terms Metrics and KPIs interchangeably – but prefer to use Metrics these days in an effort to reduce the use of 3 letter acronyms).

Many managers operate under the assumption that people work primarily for money, and that you can motivate people to work harder with a financial carrot. I often get asked how to link employee Metrics (KPIs) to individual incentive payments.

My 3-word response to them is, “Fraught with danger”.

One of the best management books I have read on this subject is Hard Facts, Dangerous Half-Truths, and Total Nonsense: Profiting from Evidence-based Management – written by Stanford Professors Jeffrey Pfeffer and Robert Sutton

One of the many “myths” exposed in their research concerns financial incentives and their impact on performance.

“Are your schools failing? Bribe teachers with incentive pay. Bad customer service? Provide financial incentives for better customer service. Airplanes not flying on time? Pay employees if the planes fly on time. Too much overtime? Give workers a financial incentive to finish early. Stock price not high enough? Give senior management financial incentives to get the stock price up. And on and on it goes, often with disastrous results.”

Assumptions about financial incentives and how they work are just that – assumptions. Organizations build complicated incentive schemes that routinely fail to produce the behavior that managers want or ever intended. Once implemented, incentive schemes are hard to undo.

I appreciate this may run counter to your beliefs. An entire compensation industry exists to perpetuate the myth that individual incentives work. But research showed that poorly designed incentive schemes do more harm than good, and can demotivate rather than motivate your people. When job roles require interdependence and cooperation (as most do), dispersed rewards (individual incentives) have consistently produced: lower job satisfaction, less collaboration, lower productivity, and weaker financial returns.

The professors are not the only ones who have come to this conclusion. W. Edwards Deming, the founder of the quality movement, wrote about the futility of expecting better company performance by trying to boost individual motivation.

Stanford Professor Chip Heath showed that managers overestimate how much employees care about extrinsic job features such as money – and underestimate how much employees are actually motivated by intrinsic job features like being able to make their own decisions and to perform meaningful work.

Do individual incentive payments work?

To be fair, individual incentive payments can work when:

  • The role is one-dimensional, repetitive and focuses on doing just one thing
  • It is easy to measure both the quantity and quality of results
  • Cheating or gaming the results is practically impossible
  • The role is completely independent – there is no need for teamwork or collaboration
  • The employee is not expected to help or support others
  • The employee has complete end-to-end control of the process and outcome

This approach worked well back in 1911 when Frederick Taylor founded the scientific approach to management. He showed that manual workers shovelling pig iron in a foundry could be motivated to work harder with financial inducements. That’s all fine and dandy, but most of us aren’t paid by how much pig iron we shovel these days.

Individual incentives could work for highly repetitive, highly independent sales roles (maybe), but for most of us, our roles are more complex, multidimensional and interconnected. We probably don’t do the same thing over and over. The quantity and quality of our work are highly likely to be affected by other people on our team, and/or other functional areas of our organization.

And make no mistake, there are many better ways to motivate people in the 21st century than the old “carrot and stick” approach from the early industrial era of management,

The conclusion I draw from the research is that if you decide to offer financial incentives in an effort to motivate your people, you are better off using team-based, or company-wide incentives. Group-based rewards encourage collaboration, teamwork, and unity of purpose.

For example, a self-funding bonus pool could be created, and payments allocated to all staff via an agreed formula based on their role, level of seniority, and tenure – if the company exceeds an agreed outcome e.g.

  • profitability 
  • liquidity ratio
  • customer retention target (churn)

Notice that I am referring to team-based “outcomes” and the option of creating a self-funding bonus pool based on achieving those “outcomes”. These are just examples. You need to determine the best measures for your business model, your current strategy, and your company’s stage of evolution. They need to be numbers that align every person, in every role, and every functional area to work together to achieve the agreed outcomes. They also need to be outcomes that have limited negative consequences so you avoid the “dark side of goal setting”.

This group-based approach to financial rewards helps to drive teamwork, break down functional silos, and create an organizational culture where everyone holds each other accountable to achieve the common goal.

And don’t get me wrong. Metrics (Key Performance Indicators) should definitely be used to manage the performance of your employees, and they should be discussed at weekly team meetings and 1 on 1 meetings as part of coaching and supporting your people to succeed in their roles.

But I strongly urge clients that these “business as usual” Metrics should NOT be tied to individual incentive payments. Jack Welch (former CEO of General Electric) maintained that achieving the agreed Metric performance threshold in any role should be “a given”. He said they are just your “ticket to the game” and not worthy of additional reward.

Here is a small selection of books I recommended if you are interested in learning more about individual incentives and motivation.

Hard Facts, Dangerous Half-Truths, and Total Nonsense: Profiting from Evidence-based Management – Jeffrey Pfeffer and Robert Sutton

The Great Game of Business – The Only Sensible Way to Run a Company – Jack Stack

Drive: The Surprising Truth About What Motivates Us – Daniel Pink

Key Performance Indicators: Developing, Implementing, and Using Winning KPIs – David Parmenter

People want to make a fair income for what they do. That means fair when compared with their colleagues and with what someone in the industry should reasonably expect to receive for their responsibilities and performance.

Money is what psychologist Frederick Herzberg called a “hygiene factor”. A hygiene factor can satisfy you, but it won’t motivate you. If we don’t think that we’re paid fairly, we get de-motivated. But once hygiene factors are satisfied, supplying more of them doesn’t motivate people.

Interestingly, it is your middle managers who are responsible for creating most of the motivational factors that drive superior performance. Middle managers drive business execution.

I appreciate my recommendations in this article may run counter to what many of you have practised up until now, and an entire compensation industry exists to perpetuate the status quo.

I’ll leave you with this parting thought. Imagine you are the manager of a sports team. Your goal should be to align everyone on the team to play well together and win the match, not to incentivize people to focus on their own performance while the team loses the game!

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Until next time…
Stephen

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