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Incentives

Peter Leppik | Mar 20, 2016 91 views 7 Comments

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A few weeks ago the Harvard Business Review published an article with the provocative title, Stop Paying Executives for Performance. The main thesis was, as you might expect, that companies should stop paying executives for performance. The authors give a number of reasons:

  • Performance-based pay only really improves performance for routine tasks, not activities which require creativity and out-of-the-box thinking.
  • The best performance tends to come when creative professionals focus on improving their skills rather than focusing on outcomes.
  • Intrinsic motivation is more powerful than extrinsic motivation, and performance-based pay tends to only drive extrinsic motivation.
  • Performance-based pay encourages people to cheat to hit bonus thresholds.
  • No performance measurement is perfect.

You can argue about whether the authors’ conclusion is right (and in the comment section of the article several people argue that they are wrong), but there’s no question they make a strong case for an interesting and counterintuitive idea.

To me as a Customer Experience professional, what’s most interesting about this is that the same arguments can be made about performance-based pay for many customer-facing employees, since delivering a great customer experience often requires employees to go beyond the rote skills and find creative solutions to the customers’ problems.



A great example of this is the declining use of Average Handle Time (AHT) in many call centers. Over the past ten years I’ve spoken with a lot of call center managers who have stopped evaluating (and compensating) their customer service reps based on how long they spend on the average call. Every single one has described significant improvements in the customer experience. Several also said that their AHT didn’t even go up as a result.

Removing AHT from the employee’s compensation meant that reps were freed from having to worry about the mechanical part of their job–how quickly they could get someone off the phone–and instead think about the best ways to solve the customer’s problem. The other problems with performance-based pay also show up in customer service, since focusing on AHT can lead employees to cheat (for example, by occasionally “accidentally” hanging up on a customer at the beginning of a call). AHT turns out to not be as tightly tied to operational cost as most managers expect, because customers will often call multiple times if they don’t get the service they need the first time.

Moving away from performance-based pay would be an enormous cultural change in today’s business environment where the implicit assumption is that money is the best, or even only, way to motivate employees. But there’s decades of research in behavioral economics showing that money is only a mediocre way to drive performance in many circumstances.

If you’re using performance-based pay to try to improve your customer experience, it’s worth thinking about whether you’re really driving the behavior you want.

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7 Responses to Incentives

  1. Chip Bell March 21, 2016 at 5:20 am (189 comments) #

    Thanks for the thoughtful post. You will get a lot of differing views on this one. But, if we go back to Herzberg’s Motivation-Hygiene theory (crafted through research done of factory workers at Western Electric plants, we get clear guidance that the feeling of achievement, recognition, growth and the work itself tend to motivate employees while pay, supervision, working conditions, etc. are dissatisfiers if they are absent but not motivators if they are present. The quality of work life goes up when we move ahead from the carrot-stick philosophy and focus instead on creating a work environment that supports, inspires, includes, affirms, and empowers.

  2. Steve DiGioia March 21, 2016 at 5:29 am (56 comments) #

    Peter, I don’t have experience with AHT but can easily see how it an be abused, as you also mention in your article.

    If shorter call times are desired so too should poor performing call center agents. It cannot be realistic to expect an agent designed to provide a problem-solving service to the customer while doing so in the shortest time possible, especially if that’s the driving force behind the call.

    The overall experience is crafted by not only the product but in the after-sale resolution.

  3. Gemma Tylor March 21, 2016 at 5:45 am (1 comment) #

    Great article! “Intrinsic motivation is more powerful than extrinsic motivation, and performance-based pay tends to only drive extrinsic motivation.” that is what separates CEO’s from true leaders.

  4. Michael Lowenstein March 21, 2016 at 6:11 am (1320 comments) #

    Before MBNA became part of Bank of America, key customer-related performance indicators were posted daily on TV screens all over their buildings, so that everyone could see how the organization was doing. Recognizing that overall employee commitment and contribution were involved, everyone was bonused if they exceeded periodic goals.

    Measures like AHT, indeed many of the antecedent measures used to evaluate staff performance in groups like Customer Service, do more to create pressure and undermine teamwork than “eyes on the prize” goals such as future purchase likelihood, level of advocacy, positive customer experience and customer retention.

  5. Andrew Rudin March 21, 2016 at 1:44 pm (861 comments) #

    I agree that there is an implicit assumption that offering money is an effective way to motivate employees. It’s always valuable to question assumptions.

    But as I shared in an earlier article, Teach Your Sales Force Well: Learning from Pay-for-Performance, there are three other purposes for compensation based on performance: communication, risk sharing, and screening. The article contains more details, but I’ll summarize them here:

    Communication. The activities and outcomes that are paid for determine where the employee’s effort goes.

    Risk sharing. When outcomes are not guaranteed, companies can afford to pay when the desired result has been achieved.

    Screening. Pay structures determine who will apply for a position. A risk-averse individual would not likely consider a position with a high proportion of variable pay.

    (Note: Though I wrote my article about sales compensation, these pay-for-performance purposes pertain to any position that receives variable pay.)

    Each of these reasons are underpinned by assumptions of their own – also worth questioning. But it’s important to recognize that motivation is just one reason that companies might use pay-for-performance, and any of them could apply to call-center personnel as well.

    As far as the HBR authors’ assertion that “Performance-based pay only really improves performance for routine tasks, not activities which require creativity and out-of-the-box thinking” – my feeling is, so what? If what’s desired is a result, does it really matter whether it comes from ‘routine tasks’ (however those are defined), ‘creativity’ or ‘out-of-the-box thinking’ (whatever that is)?

    To me, that opens a huge can of worms. Who can reliably judge any of these things? And who needs to, as long as the result has been achieved?

  6. Leila Downey June 9, 2016 at 4:05 am (1 comment) #

    I would very much like to point out that “The best performance tends to come when creative professionals focus on improving their skills rather than focusing on outcomes.” is absolutely true. At least for my company and my experience. Making people driven by performance is so wrong. Thinking outside of the box is what makes the difference. It is difficult, but that’s what I am focusing on.

  7. Carrie Rosberg June 13, 2016 at 5:42 am (1 comment) #

    I agree. Thinking outside of the box, creative and fresh ideas are one of the most important things for business development. It is necessary to employ new staff with a lot of innovation skills.

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