$100 bill bought for $150 – how we are not so smart.

Derek Sivers writes a wonderful post on a great behavioral economic study (a version of the “dollar auction).  Too often we get caught up in “the game” and lose sight of the larger picture.  It is the classic case of loss aversion – but with some unintended consequences.

http://sivers.org/game

Enjoy!

Behavioral Based Incentives: Do’s and Don’ts

Behavioral based incentives (incentives that recognize behaviors and actions instead of results) can be very powerful motivators inside of a company’s overall reward framework.  In many instances, behavioral based incentives are the only way that an organization can recognize employees for work that is vital to their success.  This includes times when outcomes cannot be effectively measured, where outcomes are not immediately contingent on individual contributions, and where there may be ethical or legal components that prohibit outcome based rewards.   Research also suggests that behavior based incentives can be advantageous to the organization in a number of ways including but not limited to: the ability to reward long-term behaviors that will not have a short-term payoff, improve fairness of recognition due to inequities in the market place, provide more focus on soft-skills necessary to long-term success, and help drive non-sales activities that are desirable by the organization (Anderson & Oliver, 1987 & 1994; Baker, Jensen and Murphy, 2012).

While behavior based incentives can be very powerful motivators, they also can have a negative impact on overall moral and motivation if not properly implemented.  There are a number of potential pitfalls with how

Some Potential Roadblocks:

Ambiguous measurement / Perception of fairness: Behavior based rewards often have ambiguous qualitative rating processes which can result in different interpretations of the same behavior or action.   In other words, one person might feel that they are exhibiting exactly the right behaviors while another would view those same behaviors as poor or unsatisfactory.  This dual interpretation can lead to individuals feeling as if they are being unfairly measured.  Research by Meyer has shown that 58 percent of employees rated their own performance as being in the top 10 percent of their peers and that 81 percent rated themselves in the top 20 percent while less than 2% of the people rated themselves below the median.

Lack of Trust: Individuals often state a lack of trust in both the organization and in their manager to effectively be able to assess their performance.  Often this is related to the perception of fairness listed above, but many times this is also the result of lack of understanding on the incentive process.

Short time horizon vs long term impact: Behavior based incentives are powerful motivators, in part, because individuals can be rewarded shortly after they exhibit the desired behavior, thus reinforcing that behavior.  This short-term focus however, does not always correlate to long-term success.  Thus behaviors often revert back to the status quo once the incentive is removed.

Gaming the system: as in any incentive scheme, behavior based incentives can be gamed.  Participants might act differently when they know they are being observed by their manager or otherwise try to create a false impression of their behaviors.

Some Best Practices:

Specificity: There needs to be a very clear definition of what is being measured and how it is being rated.  This specificity needs to be clearly understood by both the participant and the manager.  While this does not imply that there cannot be qualitative judgments made about an individual’s behavior, it does mean that the manner in which those judgments are determined needs to be transparent and agreed to in advance.  This requires significant investment prior to implementation to fully identify, define, communicate, train, and create tools to ensure full understanding.

Leaders should ensure that they have fully invested in the measurement process and communication of the behavior measures.  This includes:

  • Clear definitions around behavior expectations
  • Behavior examples that are used as illustrations for expected behaviors
  • Training campaign for managers on both “how to” measure as well as “how to” communicate their rating (provide feedback)
  • Communication campaign that clearly and succinctly highlights expectations and outcomes

If there are quantifiable elements (that are relevant and valid) that can be included as part of the overall measurement process, these should be included – even if they are used as back-up or reference components and not directly tied to the payout.

Measurement process calibrated across managers:  Key to success is the consistent rating of individuals across managers.  Top organizations ensure that there is training on how to measure, but also do periodic check-ins to ensure that the measurement process is calibrated (i.e., that managers are giving similar ratings for similar behaviors).  Note, this is not a calibration of ratings at the end of a quarter or period, but a review of processes and feedback for the managers for how they can be consistent to the norm.

Milestone check-ins with long-term bonuses:  Behavioral economics shows that individuals place higher value on relatively smaller rewards that are achieved in near term over larger rewards that require longer time horizons.  Motivational research shows that near term rewards can drive quick uptake on behaviors, but does not correlate to long term behavioral change.  However, incentives with longer time horizons have been shown to drive more long term behavior adoption.   Combining these factors, best companies have used a process whereby they have a long-term bonus kicker with short-term milestone check-ins.  Often, short-term check-ins are done as on-the-spot rewards given by managers from specific discretionary budgets for this purpose.

Never Quit!

the following words were from a father to his son – written in a letter as the boy went off to university in 1908.

 

“That is all the secret of success. Never quit!
If you can’t win the scholarship, fight it out to the end of the examination.
If you can’t win your race, at least finish—somewhere.
If your boat can’t win, at least keep pulling on your oar, even if your eye glazes and the taste of blood comes into your throat with every heave.
If you cannot make your five yards in football, keep bucking the line—never let up—if you can’t see, or hear, keep plugging ahead! Never quit! If you forget all else I have said, remember these two words, through all your life, and come success or failure, I shall proudly think of you as my own dear son.”

John Swain.

These are words that I want to repeat to myself and to my son…thought you might like them.

Labels – why they “are” and “are not” important

PlutoThe 9th Planet

Growing up in the 1970’s I had a fascination with Pluto.

It was cool.  It was the farthest planet from the sun.  It was the smallest planet.  It’s orbit intersected with Neptune’s and sometimes was closer to the sun and other times further away – but it would be 100’s of years before that happened since it takes over 200 years to orbit the sun.  It was the last planet discovered and it was discovered because they were looking for planet X.  It was cold and icy and mysterious.

I mean it couldn’t get much cooler.

The only downside was that Mickey Mouse’s dog was named after it…

But then, in 2006, the International Astronomical Union (IAU) downgraded Pluto from the 9th planet to a dwarf planet.

Now, the basic make-up of Pluto hadn’t changed.  It’s orbit was still the same.  It’s size the same.  It’s history hadn’t suddenly been altered – but Pluto was no longer a planet.

And now, my son, who was born in 2006, will never know Pluto as the 9th planet.  It will be just one of the many dwarf planets that are in the Kupier belt and not even the biggest one.  He won’t be reading about it in any of the new solar system books.  He will grow up in an 8-planet solar system.  Our knowledge of the solar system changed, and with it, so did Pluto.

But Pluto is still Pluto – only it’s label has changed. 

3 letters

I started my PhD process in 2003.  It took me 8 years to finish.  Over those years, I learned a lot and my experiences grew (mostly in the first few years where I was taking classes and researching my topic and less in those last 5 years when I was trudging through writing my dissertation).  However, the difference in knowledge and skill the day before I earned my diploma and the day after I earned my diploma was zero.

But people looked at me differently – my label had changed. 

I taught the same sessions.  I did the same consulting work.  Yet, I was now viewed as an expert.   I had three letters after my name and that gave me clout and authority.  It actually changed the way that they experienced the information that I shared with them. 

People who didn’t know me prior to my PhD would never know that I was once just one of the many struggling students out there working hard at getting their dissertation done.  To them, I was Dr. Nelson.  Just as my son won’t think of Pluto as a planet, these people will not think of me as anything but having a doctorate.

And that changes how they perceive me.

But I’m still me.  Pluto is still Pluto.  We just have different labels…but those labels change how people view us.  They can change the dynamics that we have with individuals – how much attention we get, how much credence is placed on us, and how they interpret the information that we provide.

And remember, we place a lot of labels on people: president, chairmen, all-stars, diva’s, minister, deviants, heroes, just to name a few.   Those labels impact how we interact with those people – but underneath it all, we need to remember that they are still human beings.

More info on Pluto here: http://en.wikipedia.org/wiki/Pluto

How We Are Developing a Reward and Recognition System using the 4-Drive Model

I’m consulting with a 12 Billion dollar sales division of a Fortune 500 company regarding the future of their reward and recognition system.  Without going into much detail, they are trying to take a strategic approach to how they can improve the effectiveness of their reward programs.  As part of this process, we are using the 4-Drive Theory as a model to help guide how we build this system.

As one can imagine, the organization’s current reward and recognition programs rely heavily on the Drive to Acquire & Achieve.  By far, this was the predominant focus for over 90% of the components.  Additionally, our research showed that the current system has a number of legacy programs and other recognition items that are no longer strategically aligned with the organizational mission.

There are a number of ways that a reward system can be developed.  We aligned on developing a system that would tap into all four of the drives and focus on motivating actions on three specific sales behaviors.  With this in mind, we wanted to create a framework that would leverage various reward and recognition components.  That framework is shown below:

Reward and Recognition components

Within each of these four components could be a number of different programs that would be focused on driving one or more of the desired behaviors.  We also identified that while any of the components could activate any of the four motivational drives, that particular drives would be more readily activated by programs within specific components.  We’ve mapped this below:

R&R and the 4-Drives

So while both the incentive compensation and the non-cash components easily activated the drives to acquire and challenge, group trips and other recognition were more likely to tap into the drives to bond and defend.   This provided us with a framework to think about how we could leverage all four drives with various reward and recognition programs.

While this is a high level perspective, it does provide a company with way to think strategically about their reward and recognition system that aligns it with the 4-Drive Model.  We were able to map out specific programs within this framework that provided both a means for effectively driving behavior as well as leveraging all four drives.

To our knowledge, this framework has not been used previously within a large company.  We are very excited about how this is being applied and the impact that it will have.
Please let us know if you have any questions or thoughts by leaving a comment below.   Thanks.

 

 

 

 

 

 

Making Change Happen

Change is hard.  In fact, it is damn hard.  Yet we are being asked (or forced) to change more frequently than ever – in both our personal and business lives.  The world is moving and changing faster than at anytime in our history.  Think about it, five years ago, no one owned an iPhone.

Most people don’t like change.  We fight it.  We avoid it.  We dismiss it and hope that it will just go away

Change often makes us uncomfortable.  It alters how we do things, how we think about things, how we perceive things.  It causes us to change habits that we’ve been perfecting for years and years.  Change often replaces things that we’ve held dear for a long time – with new things that we are uncertain about.

Example: I used to advertise in trade journals.  Now we focus more on social media and the web.  Because I’m not alone in this shift, trade journals are forced to change how they do business or go out of business.  They have to overcome a paradigm shift and explore unknown avenues of generating business.

So what separates those companies that are successful at change and those that are not?

Great leaders

Great leaders understand that change is hard.  They know that just issuing a command from up-top isn’t going to be enough to make change happen down in the trenches.  They understand that they need to work at changing the systems and environment in the workplace to allow change to happen. Great leaders understand that they need to show why change is necessary and important – not just for the stockholders, but for the workers and the customers.  Successful change requires a multifaceted approach that requires fortitude to keep with it and not revert back to old ways of doing things at the first sign of resistance or negative results.

Focus on people

All the companies that I’ve worked with that were successful with change did one thing really well – they focused their energy on their people.  When a large division of a telecommunication firm implemented a major new computer system and software that impacted their sales force, they spent months in communicating, training, and listening to their employees.  They adapted their processes not only because of the new systems capabilities, but to help drive the adaption of the system with their employees.

Communicate, communicate, communicate

Look at any book on organizational change and you will see that communication is vital.  Companies that are successful at change make sure that they over communicate elements about the change to their employees, their suppliers, their customers and often even to the general public.  Successful communication tells a story and starts to impact the culture – not only explaining the “what” and the “how” but the “why” and “impact.”

Make change as easy as possible

If I’m on a diet, I don’t want to be tempted by the ice cream in the freezer so I don’t buy ice cream and keep it in the freezer.  In the same way, companies that do change successfully take away those elements that could entice workers to not change.  They focus on getting the right people working together with the right tools and with the right incentives.  Too often I’ve seen change initiatives that do a great job of being led by management, having training and communications reinforce the key messages, and then fall flat because the recognition or incentive system hasn’t been changed or wasn’t changed enough.  For instance, a large company was trying to change the sales culture to one of great customer service and they even added in a metric to their incentive plan around customer satisfaction.  However, the sales team quickly realized that sales results still drove the majority of the incentive plan and trumped the customer measure hands down.  Needless to say, the focus on customer service was more lip service than getting that next sale.

Let me know your thoughts and your experiences with change – good and bad…