Talent Management Column

Rethinking Incentives and Discipline

What would happen to overall productivity if organizations gave out performance bonuses before workers have even achieved their goals? Based on a recent study of student performance in Chicago, the answer may just surprise you.

Monday, September 10, 2012
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I've been spending a fair amount of time the past year or so around managers from China. They are, frankly, not particularly good at managing issues around human resources. That's not a big surprise given that they have only been exposed for a decade or so to anything like contemporary labor markets and (more or less) capitalist enterprises. But they know they aren't good at it and are determined to learn.

Here's the question they ask that just blew me away when I first heard it: What is the appropriate punishment for workers? Of course, my first reaction was to think, what a primitive idea, that workers should be punished. In some Chinese factories, management begins the workday by calling forward the employees who screwed up the previous day and berating them in front of everyone. In other places, it's even worse.

Then it hit me: They don't fire anyone. Maybe it's a legacy of state-run operations, maybe it's cultural, but at least in the operations I was seeing, they didn't think about getting rid of employees, or at the very least it was at the bottom of their list of options. So they were basically asking, what can we do when we need to shake-up these lifetime employees?

I also stopped feeling quite so smug about management practices here. Especially at the management and executive level, it seems like getting rid of people who aren't working out is the first option. In labor relations, firing employees used to be called the "capital punishment" of the workplace, the final option. Yes, we have performance-improvement plans -- opportunities to get performance up -- but when that doesn't work out, we now usually go right to dismissal. And it's an open secret that a lot of layoffs target poor performers.

What we do believe in is incentives. That sounds like a good idea, except it is pretty expensive to put enough money into those incentives to make them effective. Merit pay increases are so small in most organizations that they hardly matter. Stock options are nice ideas, but they don't relate to individual performance. 

Here's something about motivation that we know from the social sciences: We are much more motivated by the threat of a loss of $100 than the gain of $100. What if we made use of that principle? 

A group of academic researchers tried just that in a study of student performance in Chicago public schools. The idea that we should pay teachers for better performance of their students has been used without a lot of success. What this study tried was the equivalent of a claw back in executive compensation: We give you a bonus, but then we want it back if your students fail to meet achievement targets. They compared this to a traditional incentive plan where you get the bonus if your students meet those targets. 

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What they found was that the traditional incentive plan had virtually no effect on student performance, but the claw-back plan had a really big effect, about as big as we've seen in any efforts to improve academic achievement. 

Should we think about claw-back arrangements as punishments? They probably are just that, but if we were good marketing people, we'd call them something like "enhanced bonus plans." There is strong evidence not just from this study but from lots of others as well that arrangements like these have big effects on motivation and outcomes in other jobs as well. Will they spread? They don't cost more money than traditional incentive plans, and they do seem to work much better than those traditional arrangements. But my guess is that it will be difficult for leaders to get their heads around the notion that giving people bonuses or other rewards before they have achieved anything is a good idea even though the evidence shows clearly that it is. 

Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School. His forthcoming book is Why Good People Can't Get Jobs: The Skills Gap and What Companies Can Do About It.

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