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For your final project, you will analyze the WeaveTech: High Performance Change case study in order to develop a proposal. You will have to consider the important aspects of the company within the case study when formulating the proposal. When developing your proposal, make sure that all elements align with the mission, vision, and goals of the organization. Be sure to support your proposal with appropriate scholarly sources.

 For Milestone Two, you will develop a draft of a performance management system and total rewards plan for WeaveTech. You must consider individual employee and organizational needs as well as federal laws and regulations in the development of your performance management plan. In addition to the performance management plan, you will devise a total rewards system and compensation and benefit strategies that are appropriate for the organization. At this point, you should be considering the implementation of self-service technologies at WeaveTech and preparing a message to stakeholders on issues regarding self-service technologies as they relate to benefit programs.

The resources that support this milestone include the WeaveTech Case Study, Why Incentive Plans Cannot Work. This case study is available as part of your custom e-text and is listed at the end of the text, under the heading “Harvard Business Case Studies”. Your submission should contain all of the elements for Section II of your final product, including all of those listed below.

 Your instructor will grade your submission using the rubric below and will provide feedback to be applied to the final project.

Begin by using the following guiding questions for your analysis. Then, once your analysis has been completed, draft a performance management system and total rewards plan that thoroughly covers each of the critical elements listed in A through F below the guiding questions.

 1. Based on the data presented in Exhibit 5 in the WeaveTech case study, what are some of the potential flaws with the performance management system at WeaveTech?

2. How would you change the performance management system to enhance the organization’s strategy, mission, and support for employees?

3. How can the performance management system best enable the workforce to meet individual and organizational goals?

4. What performance appraisal methods could be applicable to this organization?

5. What are some of the legal and regulatory issues to consider in regard to the performance management methods?

 6. How can WeaveTech use its total rewards programs to encourage proper behavior and reward employees?

 7. How can self-service technologies be used by WeaveTech to communicate to stakeholders and enhance the strategic focus of human resources?

Specifically, the following critical elements must be addressed:

 II. Performance Management Systems and Total Rewards: In this part of the assessment, you will develop a performance management system and total rewards plan for this organization.

 A. Develop a performance management system designed to enhance the organization’s strategic mission of quality support for employees.

B. Evaluate how your developed performance management system complies with federal laws and regulations. In other words, are there any concerns about compliance issues?

 C. Evaluate how your developed performance management system enables the workforce of the company to meet individual and organizational needs now and in the future.

D. Determine appropriate performance appraisal methods that could be applicable to this organization. In other words, what method do you propose, how does it relate to compensation, and so on.

 E. Develop a total reward system that encourages proper behavior and rewards appropriate employees.

F. Develop compensation and benefit strategies to include job evaluation strategies, pay programs (variable or merit), and benefit programs. Explain how you would communicate to appropriate stakeholders issues regarding self-service technologies as they relates to benefit programs. In other words, how would you write a memorandum or other appropriate message to stakeholders on issues regarding self-service technologies as it relates to benefit programs?

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If you want to build a committed, collabora- tive, and creative workforce, you have to pay employees for excellence, right? Not necessarily. Though most U.S. corporations use incentive programs, trying to reward quality may be a fool’s errand.

Why? Studies show that people who expect to receive a reward for completing a task typically underperform compared to those who expect no reward—particularly if the task requires sophis- ticated thinking. At the executive level, studies reveal minimal or even negative correlations between pay and performance, as measured

by corporate profitability and other criteria.

Why Rewards Don’t Work

Pay-for-performance carries a high price for your organization in six respects:

1. Pay doesn’t motivate. People need money, of course. But when asked what they care about most, pay typically ranks only fifth or sixth. Though cutting pay would damage morale, increasing it won’t necessarily improve performance.

2. Rewards punish. “Do this and you’ll get that” rewards aren’t too different from “Do this and here’s what’ll happen to you” punishments. People make little distinction between not receiving an expected reward and being punished. Pay-for-performance usually makes people feel manipulated rather than moti- vated to explore, learn, and progress.

3. Rewards rupture relationships. When you force people to compete for rewards, team- work evaporates. Viewing teammates as obstacles to their own success, employees pressure the system for individual gain. And instead of asking for help from managers— essential for enhancing performance—they conceal problems and present themselves as infinitely competent.

4. Rewards ignore the causes behind problems.

To solve workplace problems, managers must understand their causes: Are employees inad-

Why Incentive Plans Cannot Work

Whether it’s piecework pay, stock options, commissions, or Employee of the Month privi- leges, pay-for-performance gains you one thing: temporary compliance. It may change people’s behavior in the short run, but it doesn’t alter the attitudes driving behavior. It can’t create

an enduring commitment to your company’s values or lasting, meaningful change.

So how can you build an exceptional work- force? Understand the real costs of pay-for- performance. Then consider more potent strategies—including long-term goal setting and training.

equately prepared? Unable to collaborate? Burned out? Too many managers use rewards as substitutes for what workers really need: useful feedback, social support, and room for self-determination. Dangling bonuses may be easy—but it impedes managers’ ability to ful- fill their real responsibilities.

5. Rewards kill creativity. Incentives encourage people to focus on precisely what they’ll get for completing a task—not what might be gained by taking risks, exploring new possi- bilities, and playing hunches. Rewards pull people’s attention away from excellence. Employees may manipulate task schedules or behave unethically to “make the numbers.” To finish the task as expediently as possible, they’ll opt for simplicity and predictability, not challenge.

6. Rewards undermine interest. If your goal is excellence, no artificial incentive can match the power of intrinsic motivation: people working because they love what they do. Rewards undermine intrinsic motivation by making people feel controlled and devaluing their work—especially when tied to interest- ing or complicated work. When people view their work as externally directed and unwor- thy, they won’t approach it with a commit- ment to excellence.

THE IDEA

AT WORK

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When reward systems fail, don’t blame the program – look at the premise behind it.

Why Incentive Plans Cannot Work

By Alfie Kohn

It is difficult to overstate the ex- tent to which most managers and the people who advise them believe in the redemptive power of rewards. Certainly, the vast majority of U.S. corporations use some sort of pro- gram intended to motivate employ- ees by tying compensation to one in- dex 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 assumption and the practices associated with it are pervasive, but a growing collec- tion of evidence supports an oppos-

ing view. According to numerous studies in laboratories, workplaces, classrooms, and other settings, re- wards typically undermine the very processes they are intended to en- hance. The findings suggest that the

failure 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.

Temporary Compliance

Behaviorist theory, derived from work with laboratory ani- mals, is indirectly re- sponsible for such pro- grams as piece-work pay for factory workers, stock options for top exec- utives, special privileges accorded to

Employees of the Month, and commissions for salespeople. Indeed, the livelihood of innumer- able consultants has long been based on devising fresh formulas for com- puting bonuses to wave

in front of employees. Money, va- cations, banquets, plaques – the list of variations on a single, simple be- haviorist model of motivation is lim- itless. And today even many peo- ple who are regarded as forward

thinking – those who promote team- work, participative management, continuous improvement, and the like – urge the use of rewards to institute and maintain these very reforms. What we use bribes to ac- complish may have changed, but the reliance on bribes, on behaviorist doctrine, has not.

Moreover, the few articles that ap- pear to criticize incentive plans are

invariably limited to details of im- plementation. Only fine-tune the calculations and delivery of the in- centive – or perhaps hire the author as a consultant – and the problem

Alfie Kohn is the author of four books, including No Contest: The Case Against Competition and the newly published Punished by Re- wards: The Trouble with Gold Stars, Incentive Plans, A’s, Praise, and Oth- er Bribes, from which this article is adapted. Kohn lectures widely at universities, conferences, and corporations on education and man- agement.

Incentives do not alter the attitudes that underlie our behaviors.

Most managers too often believe in the redemptive power of rewards.

Copyright © 1993 by the President and Fellows of Harvard College. All rights reserved.

PHOTOS BY T

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As for productivity, at least two dozen studies over the last three decades have conclusively shown that people who expect to receive a reward for completing a task or for doing that task successfully simply do not perform as well as those who expect no reward

at all. These studies examined rewards for children and adults, males and females, and included tasks ranging from memo- rizing facts to creative problem-solving to de- signing collages. In general, the more cognitive sophistication and open-ended thinking that was re- quired, the worse people performed when working for a reward. Interest- ingly enough, the researchers them- selves were often taken by surprise. They assumed that rewards would produce better work but discovered otherwise.

The question for managers is whether incentive plans can work when extrinsic motivators more generally do not. Unfortunately, as author G. Douglas Jenkins, Jr., has noted, most organizational studies to date – like the articles published – have tended “to focus on the effects of variations in incentive condi- tions, and not on whether perfor- mance-based pay per se raises perfor- mance levels.”

A number of studies, however, have examined whether or not pay, especially at the executive level, is related to corporate profitability and other measures of organizational performance. Often they have found slight or even negative correlations between pay and performance. Typi-

Rewards do not create a lasting commitment. They merely, and temporarily, change what we do.

will be solved, we are told. As Her- bert H. Meyer, professor emeritus in the psychology department at the College of Social and Behavioral Sci- ences at the University of South Florida, has written, “Anyone read- ing the literature on this subject published 20 years ago would find that the articles look almost identi- cal to those published today.” That assessment, which could have been written this morning, was actually offered in 1975. In nearly forty years, the thinking hasn’t changed.

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. When it comes to producing lasting change in attitudes and behavior, however, rewards, like punishment, are strikingly ineffective. Once the rewards run out, people revert to their old behaviors. Studies show that offering incentives for losing weight, quitting smoking, using seat belts, or (in the case of children) act- ing generously is not only less effec- tive than other strategies but often proves worse than doing nothing at all. Incentives, a version of what psy- chologists call extrinsic motivators, do not alter the attitudes that under- lie our behaviors. They do not cre- ate an enduring commitment to any value or action. Rather, incentives merely – and temporarily – change what we do.

cally, the absence of such a relation- ship is interpreted as evidence of links between compensation and something other than how well peo- ple do their jobs. But most of these data could support a different con- clusion, one that reverses the causal arrow. Perhaps what these studies reveal is that higher pay does not produce better performance. In other words, the very idea of trying to re- ward quality may be a fool’s errand.

Consider the findings of Jude T. Rich and John A. Larson, formerly of McKinsey & Company. In 1982,

using interviews and proxy state- ments, they examined compensa- tion programs at 90 major U.S. com- panies to determine whether return to shareholders was better for cor- porations that had incentive plans for top executives than it was for those companies that had no such plans. They were unable to find any difference.

Four years later, Jenkins tracked down 28 previously published stud- ies that measured the impact of fi- nancial incentives on performance. (Some were conducted in the labora- tory and some in the field.) His anal- ysis, “Financial Incentives,” pub- lished in 1986, revealed that 16, or 57%, of the studies found a positive effect on performance. However, all of the performance measures were quantitative in nature: a good job consisted of producing more of something or doing it faster. Only five of the studies looked at the qual- ity of performance. And none of those five showed any benefits from incentives.

Another analysis took advantage of an unusual situation that affected

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On Incentives

“The Pay-for-Performance Dilemma” by Herbert H. Meyer Organizational Dynamics Winter 1975.

“Financial Incentives”

by G. Douglas Jenkins, Jr. in Generalizing from Laboratory to Field Settings edited by Edwin A. Locke Lexington, MA: Lexington Books, 1986.

“Why Merit Pay Doesn’t Work: Implications from Organization Theory” by Jone L. Pearce

in New Perspectives on Compensation edited by David B. Balkin and Luis R. Gomez-Mejia Englewood Cliffs, NJ: Prentice-Hall, 1987.

“The New Performance Measures”

by Monroe J. Haegele ?in The Compensation Handbook

“Why Some Long-Term        Third Edition Incentives Fail”           edited by Milton L. Rock and by Jude T. Rich and John A. Larson       Lance A. Berger in Incentives, Cooperation, and     New York: McGraw-Hill, 1991. Risk Sharing edited by Haig R. Nalbantian     “Intrinsic and Extrinsic Totowa, NJ: Rowman &           Motivational Orientations: Reward- Littlefield, 1987.          Induced Changes in Preference for

Complexity” “Output Rates Among Welders:          by Thane S. Pittman, Jolee Emery,

Productivity and Consistency and Ann K. Boggiano Following Removal of a Financial    Journal of Personality and Social Incentive System”     Psychology by Harold F. Rothe        March 1982. Journal of Applied Psychology December 1970.           “Enemies of Exploration: Self-

Initiated Versus Other-Initiated “The Effects of Psychologically     Learning”

Based Intervention Programs on       by John Condry Worker Productivity:          Journal of Personality and Social A Meta-Analysis”       Psychology by Richard A. Guzzo, Richard D.          July 1977. Jette, and Raymond A. Katzell Personnel Psychology  “Toward a Theory of Task Summer 1985.    Motivation and Incentives”

by Edwin A. Locke

“One More Time: How Do You        Organizational Behavior and Motivate Employees?”           Human Performance by Frederick Herzberg  Volume 3, 1968. Harvard Business Review

January-February 1968.         Intrinsic Motivation and Self- Determination in Human Behavior

“An Elaboration on Deming’s           by Edward L. Deci and Teachings on Performance  Richard M. Ryan Appraisal”      New York: Plenum Press, 1985. by Peter R. Scholtes

in Performance Appraisal:     “Inferred Values and the Perspectives on a Quality  Reverse-Incentive Effect in Management Approach         Induced Compliance” edited by Gary N. McLean, et al.      by Jonathan L. Freedman, John A. Alexandria, VA: University of   Cunningham, and Kirsten Krismer Minnesota Training and     Journal of Personality and Social Development Research Center and         Psychology

American Society for Training and   March 1992.

Development, 1990.

People, Performance, and Pay

by Carla O’Dell Houston: American Productivity Center, 1987.

The Battle for Human Nature: Science, Morality and Modern Life by Barry Schwartz New York: W.W. Norton and Company, 1986.

a group of welders at a Midwestern manufacturing company. At the re- quest of the union, an incentive sys- tem that had been in effect for some years was abruptly eliminated. Now, if a financial incentive supplies mo- tivation, its absence should drive down production. And that is exact- ly what happened, at first. Fortu- nately, Harold F. Rothe, former per- sonnel manager and corporate staff assistant at the Beloit Corporation, tracked production over a period of months, providing the sort of long- term data rarely collected in this field. After the initial slump, Rothe found that in the absence of incen- tives the welders’ production quick- ly began to rise and eventually reached a level as high or higher than it had been before.

One of the largest reviews of how intervention programs affect worker productivity, a meta-analysis of some 330 comparisons from 98 stud- ies, was conducted in the mid-1980s by Richard A. Guzzo, associate pro- fessor of psychology at the Universi- ty of Maryland, College Park, and his colleagues at New York Univer- sity. The raw numbers seemed to suggest a positive relationship be- tween financial incentives and pro- ductivity, but because of the huge variations from one study to anoth- er, statistical tests indicated that there was no significant effect over- all. What’s more, financial incen- tives were virtually unrelated to the number of workers who were absent or who quit their jobs over a period of time. By contrast, training and goal-setting programs had a far greater impact on productivity than did pay-for-performance plans.

Why Rewards Fail

Why do most executives continue to rely on incentive programs? Per- haps it’s because few people take the time to examine the connection be- tween incentive programs and prob- lems with workplace productivity and morale. Rewards buy temporary compliance, so it looks like the prob- lems are solved. It’s harder to spot the harm they cause over the long term. Moreover, it does not occur to most of us to suspect rewards, given that our own teachers, parents, and

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managers probably used them. “Do this and you’ll get that” is part of the fabric of American life. Finally, by clinging to the belief that motiva- tional problems are due to the par- ticular incentive system in effect at the moment, rather than to the psy- chological theory behind all incen- tives, we can remain optimistic that a relatively minor adjustment will repair the damage.

Over the long haul, however, the potential cost to any organization of trying to fine-tune reward-driven compensation systems may be con- siderable. The fundamental flaws of behaviorism itself doom the pros- pects of affecting long-term behavior change or performance improve- ment through the use of rewards. Consider the following six-point framework that examines the true costs of an incentive program.

1. “Pay is not a motivator.” W. Ed- ward Deming’s declaration may seem surprising, even absurd. Of course, money buys the things peo- ple want and need. Moreover, the less people are paid, the more con- cerned they are likely to be about financial matters. Indeed, several studies over the last few decades have found that when people are asked to guess what matters to their coworkers – or, in the case of man- agers, to their subordinates – they assume money heads the list. But put the question directly – “What do you care about?” – and pay typically ranks only fifth or sixth.

Even if people were principally concerned with their salaries, this does not prove that money is moti- vating. There is no firm basis for the assumption that paying people more will encourage them to do better work or even, in the long run, more work. As Frederick Herzberg, Dis- tinguished Professor of Management at the University of Utah’s Graduate School of Management, has argued, just because too little money can ir- ritate and demotivate does not mean that more and more money will bring about increased satisfaction, much less increased motivation. It is plausible to assume that if some- one’s take-home pay was cut in half, his or her morale would suffer enough to undermine performance.

But it doesn’t necessarily follow that doubling that person’s pay would re- sult in better work.

2. Rewards punish. Many man- agers understand that coercion and fear destroy motivation and create defiance, defensiveness, and rage. They realize that punitive manage- ment is a contradiction in terms. As Herzberg wrote in HBR

some 25 years ago (“One More Time: How Do You Motivate Employ- ees?” January-Febru- ary 1968), a “KITA” – which, he coyly ex- plains, stands for “kick in     the      pants” – may  pro- duce movement but never motivation.

What most executives fail to rec- ognize is that Herzberg’s observa- tion is equally true of rewards. Pun- ishment and rewards are two sides of the same coin. Rewards have a puni- tive effect because they, like out- right punishment, are manipulative. “Do this and you’ll get that” is not really very different from “Do this or here’s what will happen to you.” In the case of incentives, the reward itself may be highly desired; but by making that bonus contingent on certain behaviors, managers ma- nipulate their subordinates, and that experience of being controlled is likely to assume a punitive quality over time.

Further, not receiving a reward one had expected to receive is also indistinguishable from being pun- ished. Whether the incentive is witheld or withdrawn deliberately, or simply not received by someone who had hoped to get it, the effect is identical. And the more desirable the reward, the more demoralizing it is to miss out.

The new school, which exhorts us to catch people doing something right and reward them for it, is not very different from the old school, which advised us to catch people do- ing something wrong and threaten to punish them if they ever do it again. What is essentially taking place in both approaches is that a lot of people are getting caught. Man- agers are creating a workplace in which people feel controlled, not an

environment conducive to explo- ration, learning, and progress.

3. Rewards rupture relationships.

Relationships among employees are often casualties of the scramble for rewards. As leaders of the Total Quality Management movement have emphasized, incentive pro- grams, and the performance ap-

praisal systems that accompany them, reduce the possibilities for co- operation. Peter R. Scholtes, senior management consultant at Joiner Associates Inc., put it starkly, “Ev- eryone is pressuring the system for individual gain. No one is improving the system for collective gain. The system will inevitably crash.” With- out teamwork, in other words, there can be no quality.

The surest way to destroy cooper- ation and, therefore, organizational excellence, is to force people to com- pete for rewards or recognition or to rank them against each other. For each person who wins, there are many others who carry with them the feeling of having lost. And the more these awards are publicized through the use of memos, newslet- ters, and awards banquets, the more detrimental their impact can be. Furthermore, when employees com- pete for a limited number of incen- tives, they will most likely begin to see each other as obstacles to their own success. But the same result can occur with any use of rewards; intro- ducing competition just makes a bad thing worse.

Relationships between supervi- sors and subordinates can also col- lapse under the weight of incentives. Of course, the supervisor who pun- ishes is about as welcome to em- ployees as a glimpse of a police car in their rearview mirrors. But even the supervisor who rewards can produce some damaging reactions. For i

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Recommended Reading

“A Model of Creativity and Innovation in Organizations” by Teresa M. Amabile in Research in Organizational Behavior, Volume 10

edited by Barry M. Staw and L.L. Cummings Greenwich, CT: JAI Press, Inc., 1988.

Out of the Crisis

by W. Edwards Deming Cambridge, MA: MIT Center for Advanced Engineering Study, 1986.

“Merit Pay, Performance Targeting, and Productivity” by Arie Halachmi and Marc Holzer Review of Public Personnel Administration

Spring 1987.

No Contest: The Case Against Competition, Revised Edition by Alfie Kohn Boston: Houghton Mifflin, 1992.

Punished by Rewards: The Trouble with Gold Stars, Incentive Plans, A’s, Praise, and Other Bribes by Alfie Kohn

Boston: Houghton Mifflin, 1993.

The Market Experience

by Robert E. Lane Cambridge, England: Cambridge University Press, 1991.

The Hidden Costs of Reward: New Perspectives on the Psychology of Human Motivation edited by Mark R. Lepper and David Greene Hillsdale, NJ: L. Erlbaum Associates, 1978.

The Great Jackass Fallacy

by Harry Levinson Cambridge, MA: Harvard University Press, 1973.

The Human Side of Enterprise

by Douglas McGregor New York: McGraw-Hill, 1960.

Wealth Addiction

by Philip Slater New York: Dutton, 1980.

Money and Motivation: An Analysis of Incentives in Industry by William Foote Whyte and Melville Dalton, et al. New York: Harper, 1955.

stance, employees may be tempted to conceal any problems they might be having and present themselves as infinitely competent to the manager in control of the money. Rather than ask for help – a prerequisite for opti- mal performance–they might opt in- stead for flattery, attempting to con- vince the manager that they have everything under control. Very few things threaten an organization as much as a hoard of incentive-driven individuals trying to curry favor with the incentive dispenser.

4. Rewards ignore reasons. In or- der to solve problems in the work- place, managers must understand what caused them. Are employees inadequately prepared for the de- mands of their jobs? Is long-term growth being sacrificed to maximize short-term return? Are workers un- able to collaborate effectively? Is the organization so rigidly hierarchical that employees are intimidated about making recommendations and feel powerless and burned out? Each of these situations calls for a different response. But relying on in- centives to boost productivity does nothing to address possible underly-ing problems and bring about mean- ingful change.

Moreover, managers often use in- centive systems as a substitute for giving workers what they need to do a good job. Treating workers well – providing useful feedback, social support, and the room for self-deter- mination – is the essence of good management. On the other hand, dangling a bonus in front of employ- ees and waiting for the results re- quires much less effort. Indeed, some evidence suggests that produc- tive managerial strategies are less likely to be used in organizations that lean on pay-for-performance plans. In his study of welders’ perfor- mance, Rothe noted that supervisors tended to “demonstrate relatively less leadership” when incentives were in place. Likewise, author Carla O’Dell reports in People, Per- formance, and Pay that a survey of 1,600 organizations by the American Productivity Center discovered lit- tle in the way of active employee in- volvement in organizations that used small-group incentive plans. As Jone L. Pearce, associate professor at the Graduate School of Manage-

ment, University of California at Irvine, wrote in “Why Merit Pay Doesn’t Work: Implications from Organization Theory,” pay for per- formance actually “impedes the ability of managers to manage.”

5. Rewards discourage risk-taking.

“People will do precisely what they are asked to do if the reward is signif- icant,” enthused Monroe J. Haegele, a proponent of pay-for-performance programs, in “The New Perfor- mance Measures.” And here is the root of the problem. Whenever peo- ple are encouraged to think about what they will get for engaging in a task, they become less inclined to take risks or explore possibilities, to play hunches or to consider inciden- tal stimuli. In a word, the number one casualty of rewards is creativity.

Excellence pulls in one direction; rewards pull in another. Tell people that their income will depend on their productivity or performance rating, and they will focus on the numbers. Sometimes they will ma- nipulate the schedule for complet- ing tasks or even engage in patently unethical and illegal behavior. As Thane S. Pittman, professor and chair of the psychology department at Gettysburg College, and his col- leagues point out, when we are moti- vated by incentives, “features such as predictability and simplicity are desirable, since the primary focus as- sociated with this orientation is to get through the task expediently in order to reach the desired goal.” The late Cornell University professor, John Condry, was more succinct: re- wards, he said, are the “enemies of exploration.”

Consider the findings of organiza- tional psychologist Edwin A. Locke. When Locke paid subjects on a piece-rate basis for their work, he noticed that they tended to choose easier tasks as the payment for suc- cess increased. A number of other studies have also found that people working for a reward generally try to minimize challenge. It isn’t that hu- man beings are naturally lazy or that it is unwise to give employees a voice in determining the standards to be used. Rather, people tend to lower their sights when they are en- couraged to think about what they

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are going to get for their efforts. “Do this and you’ll get that,” in other words, focuses attention on the “that” instead of the “this.” Empha- sizing large bonuses is the last strat- egy we should use if we care about innovation. Do rewards motivate people? Absolutely. They motivate people to get rewards.

6. Rewards undermine interest. If our goal is excellence, no artificial incentive can ever match the power of intrinsic motivation. People who do exceptional work may be glad to be paid and even more glad to be well paid, but they do not work to collect a paycheck. They work because they love what they do.

Few will be shocked by the news that extrinsic motivators are a poor substitute for genuine interest in one’s job. What is far more surprising is that rewards, like punishment, may actually undermine the intrin- sic motivation that results in opti- mal performance. The more a man- ager stresses what an employee can earn for good work, the less interest- ed that employee will be in the work itself.

The first studies to establish the effect of rewards on intrinsic moti- vation were conducted in the early 1970s by Edward Deci, professor and chairman of the psychology depart-

ment at the University of Rochester. By now, scores of experiments across the country have replicated the find- ing. As Deci and his colleague Richard Ryan, senior vice president of investment and training manager at Robert W. Baird and Co., Inc., wrote in their 1985 book, Intrinsic Motivation and Self-Determination in Human Behavior, “the research has consistently shown that any contingent payment system tends to undermine intrinsic motivation.” The basic effect is the same for a va- riety of rewards and tasks, although extrinsic motivators are particular-

ly destructive when tied to interest- ing or complicated tasks.

Deci and Ryan argue that receiv- ing a reward for a particular behavior sends a certain message about what we have done and controls, or attempts to control, our future be- havior. The more we experience being con- trolled, the more we will tend to lose inter- est in what we are do- ing. If we go to work thinking about the possibility of getting a bonus, we come to feel that our work is not self-directed. Rather, it is the reward that drives our behavior.

Other theorists favor a more sim- ple explanation for the negative ef- fect rewards have on intrinsic mo- tivation: anything presented as a prerequisite for something else – that is, as a means toward another end – comes to be seen as less desir- able. The recipient of the reward assumes, “If they have to bribe me to do it, it must be something I wouldn’t want to do.” In fact, a se- ries of studies, published in 1992 by psychology professor Jonathan L. Freedman and his colleagues at the University of Toronto, confirmed

that the larger the incen- tive we are offered, the more negatively we will view the activity for which the bonus was re- ceived. (The activities themselves don’t seem to matter; in this study, they ranged from partici-

pating in a medical experiment to eating unfamiliar food.) Whatever the reason for the effect, however, any incentive or pay-for-perfor- mance system tends to make people less enthusiastic about their work and therefore less likely to approach it with a commitment to excellence.

Dangerous Assumptions

Outside of psychology depart- ments, few people distinguish be- tween intrinsic and extrinsic moti- vation. Those who do assume that the two concepts can simply be added together for best effect. Motivation

comes in two flavors, the logic goes, and both together must be better than either alone. But studies show that the real world works differently.

Some managers insist that the only problem with incentive pro- grams is that they don’t reward the

right things. But these managers fail to understand the psychological fac- tors involved and, consequently, the risks of sticking with the status quo.

Contrary to conventional wis- dom, the use of rewards is not a re- sponse to the extrinsic orientation exhibited by many workers. Rather, incentives help create this focus on financial considerations. When an organization uses a Skinnerian man- agement or compensation system, people are likely to become less in- terested in their work, requiring extrinsic incentives before expend- ing effort. Then supervisors shake their heads and say, “You see? If you don’t offer them a reward, they won’t do anything.” It is a classic self-ful- filling prophecy. Swarthmore Col- lege psychology professor Barry Schwartz has conceded that behav- ior theory may seem to provide us with a useful way of describing what goes on in U.S. workplaces. Howev- er, “It does this not because work is a natural exemplification of behavior theory principles but because behav- ior theory principles…had a signifi- cant hand in transforming work into an exemplification of behavior theo- ry principles.”

Managers who insist that the job won’t get done right without re- wards have failed to offer a convinc- ing argument for behavioral ma- nipulation. Promising a reward to someone who appears unmotivated is a bit like offering salt water to someone who is thirsty. Bribes in the workplace simply can’t work.

Product no. 2799

The number one casualty of rewards is creativity. As the late John Condry put it, rewards are the “enemies of exploration.”

Do rewards motivate people? Absolutely. They motivate people to get rewards.

HARVARD BUSINESS REVIEW  September-October 1993

7

758

Harvard Business Review      Why Incentive Plans  Article © The McGraw−Hill Strategic Human Resource Management

Human Resources      Cannot Work (HBR OnPoint Companies, 2005

 (Strategic Human Resource Management 756-758)

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ARTICLES

“Introducing T-Shaped Managers: Knowledge Management’s Next Generation” by Morten T. Hansen and Bolko von Oetinger (Harvard Business Review, March 2001, Product no. 6463) One reason so many managers embrace pay-for-performance is that it’s much easier to “dangle carrots” before employees than to fulfill managers’ real responsibilities: develop- ing direct reports and creating horizontal value by sharing ideas and expertise across the company.

This article takes a closer look at the benefits of horizontal value—including better deci- sion making through peer advice, increased revenues through shared expertise and cross- pollination of ideas, and well-coordinated implementation of bold strategic moves.

How to spur the creation of horizontal value? Formalize cross-unit interactions and clearly communicate the corporate value of sharing knowledge outside individual units.

“A Simpler Way to Pay” by Egon Zehnder (Harvard Business Review, April 2001, Product no. 6765) Though Zehnder agrees that pay-for-individual- performance programs can backfire, he does recommend compensating workers for com- panywide results. At his company, executive search firm Egon Zehnder International (EZI), success hinges on employees’ networks of contacts, sharp intuition, and commitment to the firm—all qualities derived from lengthy tenure. For this reason, EZI links compensa- tion directly to seniority.

EZI pays partners a base salary; gives them an equal number of shares in the company’s

Why Incentive Plans Cannot Work

equity, regardless of tenure; and rewards them with profit shares based solely on length of tenure. Nonpartners receive base salaries and annual bonuses based on their support of their colleagues and their enhancement of EZI’s reputation, for example, through pub- lishing articles. Results? Annual profit expan- sion for 40 consecutive years, 60% of business from repeat customers, and yearly employee turnover of 2%—in an industry averaging 30%.

“The Best-Laid Incentive Plans” by Steve Kerr (Harvard Business Review, January 2003, Product no. R0301A) In this fictional case study, the CFO of Rainbarrel Products experiences firsthand the perils of incentive programs. Rather than enhancing productivity, his new performance- management system seems to be destroying the company: Rainbarrel fails to bring a breakthrough product to market quickly enough, a survey reveals a demoralized work- force, and customers lament the quality of Rainbarrel’s service.

Four experts offer explanations, including the “you get what you pay for” rule. For example, if you compensate salespeople only for sales dollars, they’ll achieve more sales—but at lower prices or with expensive extra services. Define your criteria for long-term success before launching an incentive program. Is it sales? Profits? Retained business? Then select appropriate performance metrics. Use clear, two-way communication—so employees understand and accept your company’s strat- egy and can align their performance behin

 (Strategic Human Resource Management 759)

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