I can’t feel nothing but this chain that binds me/Lost track of how far I’ve gone/ How far I’ve gone, how high I’ve climbed/On my back’s a sixty pound stone/ On my shoulder a half mile of line (The Rising, Bruce Springsteen)
Curveball: a slow or moderately fast baseball pitch thrown with spin to make it swerve downward and usually to the left when thrown from the right hand or to the right when thrown from the left hand
The “Bell-Curve” has been the mainstay of performance ratings for a very long time now. The distribution of employee performance is forced to align with the assumption that the organization has a few high performers, a few low performers and a vast majority clustering around the ‘average’ performance level. The whole idea of trying to fit everyone on to a ‘bell-curve’ is thus based on the assumption that performance in an organization tends towards ‘average’ – and I guess you can immediately spot the inherent problem with this assumption.
No organization would like to be configured to be average; yet, everything from compensation distribution to employee engagement strategies continues to be guided by this basic rule of thumb.
Popularity or Performance?
The rather uncomfortable question that needs to be asked is what is the core driver behind the performance evaluation numbers/ranking? Increasing the rewards substantially between the top performers and the rest raises the possibility of a vast majority being disgruntled. Rewarding a few much more than the rest poses challenges for traditional notions of fairness and equality in the workplace. Not making enough distinction removes the incentive to strive for better performance – especially for the outliers.
The crux of the issue lies in the question: what portion of the employees is actually driving the business results.
In an a series of interesting studies, involving 633,263 researchers, entertainers, politicians, and athletes – researchers Ernest O’Boyle Jr. and Herman Aguinis concluded that performance follows a power law distribution more closely than a Gaussian distribution. Put in other words – a few outliers are responsible for a majority of the output.
Pareto’s rule, a popular example of power law distribution – is often referred to as the “80-20 rule” i.e. 80% of the output can be attributed to 20% of the causes. Often subjected to abuse, this ‘rule’ still remains an easy way of summing up the conclusions of the power law distribution.
This insight has interesting challenges for how HR will deal with evaluating employee performance and contribution in the future.
In a traditional setup, the typical manager grapples with one or more of following while doing an evaluation:
Lack of clear quantifiable goals for the employee: Goal setting, an exercise often considered a mere formality and carried out with minimal participation from the employee and the manager comes back to haunt both when its time to evaluate performance.
Lack of a proper understanding of ground-realities: Managers are humans and are victims of their own perceptions. In the absence of intelligent means to capture customer and peer feedback combined with the previous point of incorrect or inadequate goal, managers often have an incorrect or skewed opinion of performance – especially in large teams.
Directive from HR to fit team into a bell curve: Small wavelets build up into a large wave, but small bells don’t make a big bell! The basic requirement that every team must have a Gaussian distribution borders on statistical absurdity – but continues to be a popular practice.
Fear of (increased) attrition: The team member has been working on the customer account for most of the year. The training is time consuming and team members take almost a month to start contributing. Too low a rating might increase attrition and the manager will need to find replacements – which will again need to be trained! Putting everyone near average is much safer from the manager’s perspective.
The ‘Bell-Curve’ to some extent lets the manager play-it-safe with his evaluations. A Power-Law assumption takes away that safety-net increasing emphasis on getting the evaluations spot-on. Put another way – the Gaussian assumption lets the organization be popularity focused and dilutes engagement, while the Power-Law assumption goes to the other extreme and focuses heavily on performance – posing a major challenge to established notions of engagement.
It might seem tempting to abandon the existing (flawed) system of force fitting employee performance ratings into a Bell-Curve in favour of a Power-Law distribution, but such a move would be fraught with potential pitfalls.
Not only must Justice be done; it must also be seen to be done.
Remember that much of employee disengagement revolves around a sense of justice and fairness. The organization should not only do but also be seen as providing the required tools and facilities for the employee to succeed at the task, the organization should able to and also be seen as being able to correctly evaluate how the employee is performing at the task and then finally the organization should and also be seen as adequately recognizing the contribution made by the employee. Stumbling on one or all of these will lead to employee disengagement sooner or later.
In the power-law distribution a vast majority of the organization will be rated as “below average” The new assumption in no way implies that an organization should be only made up of only top performers – in the long run this is impractical for organizations of any size. The useful insight that can be gleaned from the new distribution is distinguishing between the employees who are vital and those who are not. Alarming as it may sound, when taking decisions of whom to retain or promote, making this distinction becomes a critical success factor.
Performance systems that can highlight top performers serve as powerful tools in the hands of HR and leadership of companies looking to engage with their employees and establish a culture of high performance. The impact of interventions based on inputs from a power-law trend of individual performances will expectedly be far higher and more meaningful compared to traditional systems. The challenge however will be eliminate bias in the evaluation – the impact of any such bias will be disproportionately higher in a Paretian distribution, with potentially disastrous consequences – a true curveball!
Acknowledgements and References:
Image courtesy of FreeDigitalPhotos.net
The bell curve is a myth – most people are actually underperformers, Michael Kelly, May 2012, BusinessInsider
The Best and the Rest: Revisiting the Norm of Normality of Individual Performance, HRMA Research Briefing.
“It’s a very personal, a very important thing. Hell, it’s a family motto. Are you ready, Jerry?
I wanna make sure you’re ready, brother. Here it is: Show me the money. Oh-ho-ho! SHOW! ME! THE! MONEY! A-ha-ha! Jerry, doesn’t it make you feel good just to say that! Say it with me one time, Jerry. ” (Jerry Macquire, 1996)
You might be forgiven for assuming the dialogue I picked up from the movie Jerry Macquire was a conversation between a CEO candidate and the board member sounding him or her out. The increasing disparity in compensation packages commanded by CEOs to that of, the average employee has been a source of much debate and frustration.
Ben & Jerry’s Ice-Cream Company made a social pact with their employees when the company was founded. The company put a cap on the pay ratio between the top paid executive to the lowest-earning worker at 5:1. They held on to that ratio for 16 years. Then when it was time for Ben Cohen (the Ben in Ben and Jerry’s) to retire, they went hunting for a successor. They couldn’t find a single executive willing to accept the cap. The cap was raised to 7:1. Nada. The cap continued to be raised till it reached 17:1 over the next six years. Finally the company was acquired by Unilever USA in 2000 and nothing more was heard. The shroud of corporate secrecy descended on compensation details.
All that is about to change.
A few days back the Securities and Exchange Commission finally voted (with a narrow majority) to bring into effect a rule that will require companies to state their CEO pay as a ratio of the average worker’s pay. The hotly debated Dodd-Frank Wall Street Reform and Consumer Protection Act, is making a lot of senior executives very uncomfortable. Under the section, “Investor Protections and Improvements to the Regulation of Securities”, subtitle E refers to “Accountability and Executive Compensation.” The clause in question is as follows:
Shareholders must be informed of the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions as well as:
the median of the annual total compensation of all employees of the issuer, except the chief executive officer (or any equivalent position)
the annual total compensation of the chief executive officer, or any equivalent position
the ratio of the amount of the median of the annual total with the total CEO compensation
India is a bit ahead on the curve on this one. Under the new Companies Act 2013, the provision which had been incorporated by SEBI, for Listed Companies already requires them to start disclosing this information. Reporting on this, BusinessLine states that “Under the Companies Act, 2013, every listed company shall disclose in the board’s report, the ratio of the remuneration of each director to the median employee’s remuneration and such other details as may be prescribed.”
So, why have governments decided to wake up and start tracking compensation paid to top executives? The financial collapse of 2008 and the subsequent fallout did seem to have a lot of influence on getting governments to finally act. The ‘Occupy Wall Street’ movement with its emphasis on the remaining ‘99%’ forced lawmakers to sit up and take notice. The increasing disparity in compensation between a select few and the vast majority seemed to be boiling over into a social flashpoint – any government’s nightmare!
So, how exactly do the numbers really stack up?
To get a sense of how good or bad the compensation ratio is currently; let us first try to understand what an ideal ratio in people’s minds is. The late Peter Drucker, believed that the ratio should be 20:1 (a downgrade from his earlier number of 25:1). During the time of the Dodd-Frank Law debate, Rick Wartzman wrote to the then SEC Chairperson Schapiro. He pointed out Peter Drucker’s opinion on the issue:
“I have often advised managers that a 20 to1 salary ratio is the limit beyond which they can not go if they don’t want resentment and falling morale to hit their companies,”
In a 2004 interview, Drucker elaborated further: “I’m not talking about the bitter feelings of the people on the plant floor… It’s the mid level management that is incredibly disillusioned” by king-size CEO compensation.
At the World Economic Forum, in 2010, UNI Global Union General Secretary Philip Jennings warned of ‘gathering storms’ if the CEO gravy trains are not derailed. He said that the bloated pay packets are a source of ‘systemic risk’ and added that he supported the ‘Drucker Principle’ of 20:1 pay ratio.
In this context, let us take a look at what reality is.
In their paper titled “How Much (More) Should CEO’s Make? A Universal Desire for More Equal Pay”, Kiatpongsan and Norton state that their references point that the ratio of CEO compensation to that of the average employee increased from 20:1 in 1965 to a whopping 354:1 in 2012! The ILO has a ‘slightly’ different number they arrived at from studying the ratio in the largest firms. They say that the ratio was 508:1. The corresponding ratios in Germany – the European business powerhouse was 190:1 and 150:1 in Hong Kong, China.
Closer home, global management consultancy, Hay Group released the ‘Top Executive Compensation Report 2013-2014,’ which analyzed 2524 jobs across 176 organizations and found that CEO’s in India earn around 78 times the salary of an entry-level professional. And as companies show an increased preference to recruit CEO’s from outside the internal senior management pool; this number seems bound to rise even further.
But if you pay peanuts you get monkeys!
But do you really?
Writing in the New Yorker, James Surowiecki states that, executive compensation rose 876% or nearly 9 times between 1978 and 2011 in the US. By extension one would assume that, it is 9 times more difficult to do business now than it was four decades ago!
Then, what could possibly explain this exorbitant rise in pay? According to Surowiecki it’s a combination of factors. The first is a shocking side-effect of increase transparency. With increased transparency required by law and amplified by the business press, boards at companies fall for ‘peer-benchmarking’ to determine executive compensation. And boards which are too ‘cozy’ with the CEOs, are reduced to being rubber stamps who approve pretty much anything the CEO tells them – including the justification for an outrageous compensation package. To make matters worse, this system gets played by the ‘leapfroggers’ – the CEO’s who are either extraordinarily brilliant or just plain lucky to earn huge salaries. These, then become the benchmark for others and the spiral just goes on growing!
Just how bad can it get? Roger Martin, former dean of University of Toronto’s Rotman School of Management, in an interview to Bloomberg said “When CEOs switched from asking the question of ‘how much is enough’ to ‘how much can I get,’ investor capital and executive talent started scrapping like hyenas for every morsel. It’s not that either hates labor, or wants to crush their lives. They just don’t care.”
Hmm..How’s that for employee engagement?
But CEO’s also increase investor wealth! Surely they deserve the cut?
If the financial collapse and the bonuses handed out to top executives in ‘too-big-to-fail’ is anything to go by, the assumption that bonuses and pay are necessarily linked to performance is not true. Studies published in the Economist and by others state that there is no clear correlation between CEO pay and company performance. Quite a few studies seem to have concluded that the correlation is in-fact negative!
A paper by Bebchuk, Cremers and Peyer, in the Journal of Financial Economics, titled ‘The CEO Pay Slice’, analysed the performance of companies, in relation to the proportion of what the CEO took, as a ratio of the total pay of the top five executives. It seems that the more the CEO took compared to the executives pay, the worse the company did!
In the report by Hay Group, they found that MD/CEO’s in India take close to 3 times the pay of those in Business Enabler Roles (HR Head, CIO, R&D Head etc) and Business Core Roles (Head – Sales & Marketing, Head – Manufacturing/Operations, BU heads etc)
Just when you think things couldn’t look worse, here is one final data point. It seems CEO pay is in fact strongly correlated with one metric – the number of people they fire!
Long Term vs Short Term!
SEBI in the discussion paper on CEO compensation had stated “… on an average, the remuneration paid to CEOs in certain Indian companies is far higher than the remuneration received by their foreign counterparts and there is no justification available to that effect,”
In addition to the quantum of payment, there has been much discussion around the way executive pay is structured. The incentive structure holds the key to actions taken by CEOs. Organizations in mature markets are increasingly moving away from basic incentives like, stock options and restricted stocks to performance-linked long term incentives like performance equity, performance-based restricted stock among others.
The Hay Group finds that, Indian companies unfortunately lag far behind their global peers in this aspect. The chart below on CEO Compensation mix points out the stark difference in the structuring of pay in India versus their peers in US or Europe. (The mix is fractionally better than, that for Asia on average)
With companies being now required by law to state compensation for top executives, and the ratio of that compensation to the average pay, the fallout on engagement levels will depend on how responsible (or otherwise) the top management is.
CEO’s who have taken over 100% pay increases in years where they have given zero or minimal pay increase to the average employee who is battling runaway inflation at home and increased pressure at work (because the company has not met its performance targets!) will find it increasingly difficult to justify their stand.
There is enough research (an visible social backlash) to clearly establish that there is widespread consensus that, the gap between the top executive pay and entry level pay in an organization has to reduce – substantially so, if the current trends are to be believed. Compensation forms an important component of the need for ‘Safety’ in Maslow’s Hierarchy of Needs but, it should not become the ultimate goal.
As Jack Ma, puts it succinctly – “We only eat three meals a day, we only sleep on one bed, how can you spend money? Where’s the opportunity?”
So if you are wondering why your team is looking despondent despite of all the effort you put into motivating them, the answer just might lie buried in your company’s annual report.
References and Acknowledgements:
Image in beginning of post courtesy of FreeDigitalPhotos.net.
Graphs data/image sourced from sources mentioned against the images.
A Sweet Solution to the Sticky Wage Disparity Problem, Aug. 10, 2013, Mitchell Weiss, ABC News
What Jack Ma plans to do with his Alibaba billions, Svati Kristen Narula, September 23, 2014, Quartz India
UNI: In Davos, UNI warns of risks from Private Equity, CEO pay, 28 Jan 2010, ITUC CSI IGB
Dodd–Frank Wall Street Reform and Consumer Protection Act, Wikipedia
Executive Excess 2010: CEO Pay and the Great Recession, By Kevin Shih, Sam Pizzigati, Chuck Collins and Sarah Anderson, September 1, 2010, Institute for Policy Studies.
What’s the best way to set CEO pay?, 03 June 2013, ILO
Study: Tech CEO Pay Doesn’t Match Performance, Baseline, 17 Jul 2006
Executive pay and performance, Feb 7th 2012, Economist
Open Season, James Surowiecki, October 21, 2013 Issue New Yorker,
CEO Pay 1,795-to-1 Multiple of Wages Skirts U.S. Law, By Elliot Blair Smith and Phil Kuntz, Apr 30, 2013, Bloomberg
Why CEO Pay Will Keep Rising to Even More Insanely Unjustified Levels While Ordinary Workers Get Squeezed, October 14, 2013, Yves Smith, Naked Capitalism
Top Executive Compensation Report 2013-2014, global management consultancy, Hay Group
US follows India on disclosure of CEO-staff pay ratio, Sept 19, 2014, BusinessLine
CEOs in India earn ’78 times the salary of an entry-level professional’, January 27, 2014, NDTV Profit
What’s the right ratio for CEO-to-worker pay?, By Jena McGregor September 19, 2013, Washington Post
The CEO pay slice, Lucian A. Bebchuk,J. Martijn Cremers, Urs C. Peyer, Journal of Financial Economics, Volume 102, Issue 1, October 2011
Non è sanza cagion l’andare al cupo: (Not causeless is this journey to the abyss) – Canto VII, Inferno, Dante Alighieri
We often get to read about progressive companies that invest in and also get their employee engagement strategies right. But rarely do we talk about companies that don’t get it quite so right. It just so happened that I started reading Inferno recently (not the Dan Brown version), and it eventually got me thinking. We often have traits of Bosses from Hell, Employers from hell. But what would a hell of Companies who get employee engagement wrong look like.
Let’s take a look at how companies enter Employee Engagement Hell, shall we?
“Abandon all hope, ye who enter here”
First Circle: Limbo – Organizations go through this state as leaders aren’t quite sure if they want to get into employee engagement. “We do parties and town-halls, isn’t that enough?” As Dante would put it, this is the state where the “guiltless damned are punished by living in a deficient form of Heaven.” For some leaders, who don’t really believe in the long term pain and investment required to achieve true employee engagement, this is the least amount of damage they can do to the organization.
Second Circle: Lust – Some organizations are condemned to the second circle because, of their leaders lust for awards. A TV channel announces a new category of corporate awards and some companies suddenly see a spurge of activity. Budgets are “discovered” to spend on what they think will make employees “happy” and “excited” and much public blogging and tweeting starts. Approximately a year later, the company wins the category trophy at the awards ceremony, a page in the annual report mentions, what a great a place it is to work and then things go back to the usual. The twitter handle goes silent after a while, the blog gives up the ghost and ‘project deadlines’ take over.
Third Circle: Gluttony – A glutton is one who consumes inordinate amounts of food and drink. Some organizations try to adopt anything sold to them as ‘employee engagement.’ Every strategy, every product, every ‘tactic’ is consumed mindlessly without any thought to its relevance. The concept of engagement is driven by a few (with possibly unlimited budgets) and eventually employees tire of the disjointed activities and initiatives. With little in terms of results, such engagement projects become an indulgence of a few powerful executives. Dorothy Sayers describes it very aptly as “the surrender to sin which began with mutual indulgence leads by an imperceptible degradation to solitary self-indulgence.”
Fourth Circle: Greed – In Dante’s Inferno, this circle of hell is populated by those, whose attitude towards material goods deviate from what was appropriate. Companies who feel that handing out cash-bonuses and material awards is enough to, “engage” with their workforce are condemned to this circle. These companies forget that compensation is a combination of monetary and psychological. Big cash awards as carrots for performance can only take the company so far, and at some point the company culture will be muddied by the ambitious and the unscrupulous. Money should be used as a basic hurdle – employees should be compensated adequately for their contributions beyond that the culture depends on much more than the pay-check.
Fifth Circle: Anger – The companies that are in this circle of our employee engagement hell are “withdrawn into a black sulkiness which can find no joy.” The leaders find the whole concept of investing in employee engagement ludicrous. “We already pay them a salary and the job is what they signed up for. Why should we have to invest to ‘engage’ them all over again” they rant. And as the famous adage goes “they get what they pay for.” Customer Service employees read from a prepared text and product service engineers do exactly what the manual tells them to. Eventually the customers leave and the employees follow. In the long run, the executives don’t have to worry about paying or engaging with anyone at all.
Sixth Circle: Heresy –Leaders who go a step beyond the ones upset with having to “invest in employee engagement” and dismiss the whole notion as a fad, condemn their organizations to this circle. These organizations not only have no active strategy and plan to engage their workforce; they in fact oppose any suggestions to implement such a program. The notion of leadership tends to be very much top-down in such companies, with a few deciding what the company, the clients and the market place needs and commit the organizations to their strategic roadmap. “My way or the highway” is a good approximation of the leadership style.
Seventh Circle: Violence – Companies that tolerate leaders and managers who believe that a ‘bigger voice is better’ find themselves in this circle. They believe that the employees cannot be trusted to take decisions on their own and micro-management is the only way to ‘get things done.’ Understandably, all the good employees leave such organizations and the ones that remain are mediocre and eventually the company suffers the consequences. No innovation or sustained growth is possible for such companies, because they will receive hardly any feedback or insights into what the customers are thinking. As with Dante’s inferno for companies in this circle, “the portal of the future has been shut.”
Eighth Circle: Fraud – At the very bottom of our employee engagement hell, we head into the two circles that punish sins of fraud and treachery. In Dante’s version, this is where the panderers, the seducers and the flatterers are doomed to spend time for eternity. And so too for companies, where the leaders profess to care about their employees, but hardly walk the talk. The leaders talk about listening to the teams, but no follow through happens. Collaboration is bandied about as important, but org-charts and siloed approach towards working rules. Employee engagement gets talked about in town-hall meetings, several pages with pictures of smiling people are dedicated in the annual reports, but the employees are left feeling cold wondering what the hell the leadership is talking about. And of course with the faith in leaders eroded, even genuine statements and promises get discounted and the downward spiral towards disengagement and eventually disappointment is inevitable.
Ninth Circle: Treachery – At the very bottom is the ninth circle, where the companies with insincere execution of employee engagement programs are put. These are companies where employee engagement budgets and efforts are allocated ad-hoc with little or no oversight. This lets the middle-managers and team leaders who may not have bought into the concept to sabotage the entire program. Managers sit on budgets and don’t hand out the awards to team-members, instead showing the amount as cost savings, at the end of the year to get their own bonus. At the end of the year, the leaders are convinced that employee engagement isn’t really working and that it’s only the hard-working managers who are saving the day for everyone by somehow cutting costs. Eventually, all efforts are abandoned and the company regresses to the good-ol’ command and control approach. Guess who are the only ones smiling when that happens?
The concept of Employee Engagement Hell might be a bit dramatic. The point I wanted to make is that leaders have to put substantial thought into deciding what the organization stands for, what is the culture they wish to propagate and what the employee engagement goals are – before embarking on building out the strategy and deploying solutions. There is no quick fix for employee engagement. Employee happiness yes maybe. Employee Excitement too can be achieved in the short term with a radical overhaul. But engagement takes a long term view, a sustainable strategy and unwavering execution to achieve.
Does your organization take employee engagement seriously, or do you think it should be relegated to one of the circles of Employee Engagement Hell? Tell us in the comments section below.
Remember those days when you are just so immersed in work that you forget about everything – the irritating co-worker who is constantly talking on the phone (loudly!), the drone of the air-conditioner, even your lunch? Those are the days you were in what psychologists now refer to as a state of ‘flow’. Artists, composers are most often seen referring to a state of flow – at times when they have created some of their best work. Of course the years of practice to gain the required expertise for the task is a given. Its an almost universally accepted rule of thumb that about 10 years of deep immersion in a domain/subject is required before one can achieve the required expertise to make a significant contribution or improvement.
But even if you aren’t a maestro writing a new symphony there are moments when you just do brilliant work and write a piece of code, or make an outstanding creative for the marketing campaign. ‘Flow’ is where we would all like to be when we are doing our work – in an enlightened state, churning out the very best we are capable of creating!
So how would you know if you are in ‘in the flow’? There are six factors that scientists identify as contributing to the state of flow (I am sure you will recognize that you feel all or most of them):
intense and focused concentration on the present moment
merging of action and awareness
a loss of reflective self-consciousness
a sense of personal control or agency over the situation or activity
a distortion of temporal experience, one’s subjective experience of time is altered
experience of the activity as intrinsically rewarding
And in case you think all this reminds you of the state after five hours of binge TV watching on Sunday, that’s not flow! Passive activities don’t put you in a state of flow. In fact research has shown that people can process only about 126 bits of information per second. Having a conversation takes ~40bits/second so when you are watching a movie on TV, a large part of your processing power is already gone. (So much for the myth of multitasking.)
Mihaly Csikszentmihalyi (last name pronounced “Chick-sent-me-high-ee”) is widely recognized as the ‘architect of the notion of “flow”‘ and he refers to the notion of flow as:
Being completely involved in an activity for its own sake. The ego falls away. Time flies. Every action, movement, and thought follows inevitably from the previous one, like playing jazz. Your whole being is involved, and you’re using your skills to the utmost.
So how does one create the environment that promotes the state of flow?
Flow theory postulates three conditions that have to be met to achieve a flow state:
(1) One must be involved in an activity with a clear set of goals and progress. This adds direction and structure to the task
(2) The task at hand must have clear and immediate feedback. This helps the person negotiate any changing demands and allows him or her to adjust his or her performance to maintain the flow state.
(3) One must have a good balance between the perceived challenges of the task at hand and his or her own perceived skills. One must have confidence that he or she is capable to do the task at hand.
Mihaly published a graph in 1997 which depicts the relationship between the perceived challenges of a task and the perception one has of one’s skills. The state of flow is more likely to occur when the task to be done is a higher-than-average challenge and the individual has above-average skills. That is where the manager has to play to her role in clearly defining goals and matching the tasks to the strengths (actual and perceived) of her team members.
In 2013, Owen Schaffer broke down the prerequisites for entering a state of flow in the white-paper titled ‘Crafting Fun User Experiences: A Method to Facilitate Flow’ as follows:
Knowing what to do: Goals are set clearly and communicated clearly to the employee.
Knowing how to do it: The tasks allocated are matched with the competency of the employee to whom the task is allocated.
Knowing how well you are doing: Frequent feedback on the progress against the expected outcomes of the tasks gives a sense of progress and keeps up the motivation levels.
High perceived challenges: A feeling of a fairly high (but not impossibly high) challenge motivates the employee to put in extra effort to achieve the goal since it gives a sense of achievement – of having done something worthwhile.
High perceived skills: The feeling that skills required to perform the task are perceived as high (not ordinarily available) gives an impetus to the employee.
Freedom from distractions: This is where the manager contributes by ensuring that the employee can focus fully on the task allocated without constantly being distracted with lots of other activities/responsibilities.
And saving the best for the last: Here’s Mihaly Csikszentmihalyi himself, giving a talk about the notion of flow at TED.
References and Acknowledgements for this post:
Flow (psychology), Wikipedia, Mihaly Csikszentmihalyi: Positive psychologist, TED profile, Mihaly Csikszentmihalyi: Flow, the secret to happiness, TED Talks, Go with the Flow, Wired,
Image 1, Image courtesy of FreeDigitalPhotos.net, Image 2: Source: Wikipedia
Back in university when I was busy studying communication theory, the one thing we obsessed over was the SNR or Signal-to-Noise ratio.
The professor in charge of teaching us the nuances of what was quite a difficult topic, used to rate the pop-quizzes he gave us on a range of zero to one in increments of 0.1. He gave one to answers that got to the point correctly with little or no fluff (‘Maximum Signal and little noise’ as the prof said) and zero to those that beat around the bush and got no where in particular (‘All Noise, No Signal’). Most of us, unsurprisingly, clustered around 0.5.
Years later, I ran into my professor again. Now retired, he was more chatty that he ever was in the classroom and we got reminiscing about those much dreaded pop-quizzes. “I have a confession,” he said, laughing out loud, “there was far too much garbage for me to read through in those answer sheets you guys handed in. Very little Signal and lots of noise I used to actually read only a very few, and then just handed out those marks based on what I expected the student to write. And since nobody ever challenged me, and I got the bell curve of grades fitted out perfectly, it worked out just fine.” My jaw dropped! I spent years thinking I was just hopeless and didn’t really get antenna theory and radio signal propagation. I couldn’t have imagined that the forced bell-curve fitting would affect me even as a young student.
Anyway, coming back to the present day. Yet another ‘financial’ year is coming to an end, and very soon HR teams in most organizations will get busy preparing for that annual carnival called ‘Performance Reviews.’
Here’s what typically happens:
HR gives managers over a month to finish appraisals for their teams and sends multiple reminders. On paper there seems to be enough time to finish the process. With several other priorities vying for the manager’s time, appraisals gets pushed to the back of the list everyday and nobody ever gets around to spending the planned few hours with every employee.
So now, on the last day before the badly-designed, overtly-complicated HRM software with a few dozen fields to be filled, closes the appraisal process, the HR team resorts to hounding managers to finish appraisals before the deadline. ‘Do it or face the wrath of the Corporate Office’ the HR head threatens, out of desperation when he sees the dismal percentage of teams that have completed the process.
The naked threat works, with hours to go, all client work comes to grinding halt and team-members and managers reluctantly get down to the task of completing their appraisals. The manager now has to evaluate thirty odd people in a few hours, pulls out the goal sheet setup an year ago, he goes “Hmm….lets see now…” And soon its out with data and in with the subjective, the bias and the perceptions. (There’s that bell-curve to comply with.)
Understandably most employees see this as a futile exercise since its is very rare that tasks and goals laid out a year ago would be relevant now. Chances are very high that the employee actually worked on something very different at several points along the way, doused a few dozen crisis situations during the year, came up with a couple of innovative ideas that may or may not have been implemented, put in hundreds of hours of overtime to make up for inefficiencies or just plain bad planning. And in the few minutes he has with the manager while being ‘appraised’, the employee feels threatened. He has to secure his next year’s pay based on what transpires in the next few minutes.
Annual performance reviews are a mind-numbing exercise that most employees in the corporate world go through each year. And mind-numbing is apt! Research has shown that when a person is threatened, activity diminishes in certain parts of the brain. David Rock, author of “Your Brain at Work” says when that happens, “people’s fields of view actually constrict, they can take in a narrower stream of data, and there’s a restriction in creativity.”
Critical feedback doesn’t quite work the way its assumed:
Jena Mcgregor, in her recent article in The Washington Post, points to research by psychologists at Kansas State University, Eastern Kentucky University and Texas A&M University where they studied how people respond to critical feedback they receive in an appraisal of the work done in the year.
The assumption was that people who are motivated to learn things on their own would welcome the critical feedback and use it to improve their work. Apparently not!
The study was based on conclusions of a prior study which concluded that people aspire to reach their goals in one of the following three ways:
They try to prove their competence at work and get positive feedback.
They withdraw from tasks where they might fail and avoid negative feedback.
Focus on the learning and developing of their skills.
Obviously people who fall into the first two categories, didn’t take kindly to negative feedback in their performance reviews. But to the surprise of the researchers even those with a strong learning focus didn’t quite like the negative feedback.
When one considers all the cost and effort that HR (and the entire organization) puts into the annual performance review process, it would almost seem an utter waste of all that time and money.
Here’s the wrap up of how the annual performance review process ‘performs’ :
Based on the research mentioned above, it seems that what is intended to be a constructive and helpful discussion quickly falls apart when the appraisees hear critical feedback. (Even for those who have a strong focus on learning)
In a previous article, Jena points out that Leadership advisory firm CEB’s research found that two-thirds of the employees who are rated as the firms top performers are in fact not.
CEB research shows that managers feel conventional reviews only generate a 3- to 5% improvement in employee performance.
Only 23% of the HR professionals surveyed by CEB for their research study felt that their review process was satisfactory.
All signs point to the futility of the once-a-year performance review and yet we continue to persist with the ‘established way’. Come April-May and management is shocked when the resignations come pouring in.
Mark Hanna: The name of the game, move the money from your client’s pocket into your pocket. Jordan Belfort: But if you can make your clients money at the same time it’s advantageous to everyone, correct? Mark Hanna: No
(Dialogue from the movie ‘The Wolf of Wall Street’, 2013)
I have an article on how to ‘Engage the employee with the right reward’ up on People Matters where I continue to advocate the need for companies to find the right strategy towards rewarding their employees – doling out cash bonuses just doesn’t cut it.
This post however, is more about what I left out of that article (thanks to word-count limits and the need to stay focused on the theme). At the very beginning of the article I mention in passing how the financial collapse of 2008 exposed the flaw of a cash-bonus-linked-to-sales strategy. What I did not write about was the erosion of trust that the greed of a few caused. And lets fact it – this is true about any industry, not just banking. There are plenty of examples in other sectors like call-center employees cutting short or worse hanging up on customers, because their variable pay was linked to number of calls attended rather than issues successfully resolved, engineers using short-cuts to get automobile products out faster without adequate testing or known flaws leading to catastrophic failures or in some cases deaths.
The death spiral for the company arising out of perverse incentive structures is actually quite simple:
Wrong incentive structure -> Incorrect actions by employees -> Short term spike in sales/output->A select few get rich on commissions/bonus->Medium Term/Long Term problems come home to roost->Best case – the company/product brand takes a hit, Worst case company goes belly-up.
Jordan Belfort: My name is Jordan Belfort. The year I turned 26 I made $49 million dollars which really pissed me off because it was 3 shy of a million a week. – (Dialogue from the movie ‘The Wolf on Wall Street’)
Pre-2008 some bankers just went (massively) overboard in pushing their banks hurtling down that spiral and got the whole industry in a mess since everybody ended up doing the same shenanigans to get massive bonus payouts.
Joseph Stiglitz in his excellent article ‘In No One We Trust’ talks in depth of this erosion of trust and says
“…We had created a system of rewards that encouraged short-sighted behavior and excessive risk-taking. In fact, we had entered an era in which moral values were given short shrift and trust itself was discounted.
… Bank managers and corporate executives search out creative accounting devices to make their enterprises look good in the short run, even if their long-run prospects are compromised.”
So do we take the money-is-root-of-all-evil approach and pay people in food coupons? No. Absolutely not, but neither can leadership of companies afford to take the ‘lazy’ route to establishing a rewards strategy but just resorting to cash payouts as a percentage of profit/sales/top-line. (Remember Enron anyone? Even as the company was imploding, its executives were rewarded with large bonuses for meeting specific revenue goals.) The problem here is not only the flawed rewards structure, but something much deeper. Something for which the whole organization exists in the first place – the very raison d’etre.
The real challenge for leadership in establishing a rewards strategy – goals:
Before you worry about ‘how to reward employees’, the greater challenge is in establishing ‘what’ you are rewarding them for. “Organizational Goals!” you say and full marks to you. Employees in an organization are working on their individual goals which eventually must meld together to achieve the organizational goal. Employees at Enron were also being paid to achieve organizational goals but in hindsight it’s obvious those goals were all wrong!
Things can also go horribly wrong when impossible goals are set because, leaders shoot their mouth off or get visions of grandeur. Let’s take a short trip back in time. It’s the late 1960’s. The Ford Motor Company was fast losing ground to more fuel efficient cars the Japanese were cranking out. Lee Iacocca, a very smart man with lots of successful launches to his credit, (and the then CEO of Ford), announced the challenge of producing a new car that would weigh less than 2000 pounds and cost less than $2000 and would be available in the market in 1970. The result: skipped safety checks on the Ford Pinto that led to cars catching fire and eventually resulted in massive law suits.
So we now realize that organizations have a more fundamental problem – with goal setting. That goal usually filters down from the top – which brings us to an interesting conundrum. Going back to what Stiglitz has to say in his article.
“So C.E.O.’s must be given stock options to induce them to work hard. I find this puzzling: If a firm pays someone $10 million to run a company, he should give his all to ensure its success. He shouldn’t do so only if he is promised a big chunk of any increase in the company’s stock market value…”
Research has shown that the motivation that people will have to do the right thing or blow the whistle when things are not quite going the way they should is greatly enhanced when they feel they are working for a larger purpose than just monetary gain. When the only incentive one has is money, it tends to create the ‘stretch goal’ trap. Bigger goals – Bigger reward – Bigger bank balance! Forget everything else, all ‘that’ is somebody else’s problem. The ‘Big Whale’ trades, the LIBOR fixing scandal, the recent record fines paid by JP Morgan, Enron, the list just goes on and on.
“Of course, incentives are an important component of human behavior. But the incentive movement has made them into a sort of religion, blind to all the other factors — social ties, moral impulses, compassion — that influence our conduct.” (Stiglitz)
Setting the correct goals is thus fundamental to achieving the desired output from employees. Goals that are too narrow; are too many in number or have an inappropriate time horizon which eventually result in, higher risk taking and unethical behaviour by employees in an attempt to meet those goals.
So how do we set the right goals?
This, dear reader, is the trillion dollar question. The ultimate question of life, the universe and everything – the answer as we all know is 42! There we have it. Problem Solved. :)
With due apologies to Douglas Adams, there is no one correct answer for this. With incorrect incentives, the chances of the goals themselves being set wrongly go up exponentially. Add to that the fact that goals when applied to teams with have varied levels of challenge for its members.
In their Working Paper, ‘Goals gone wild’, Lisa D. Ordonez et al. point this out –
“Perverse incentives can also make goal setting politically and practically problematic. When reaching pre-set goals matters more than absolute performance, self-interested individuals can strategically set (or guide their managers to set) easy-to-meet goals. By lowering the bar, they procure valuable rewards and accolades. Many company executives often choose to manage expectations rather than maximize earnings. In some cases, managers set a combination of goals that, in aggregate, appears rational, but is in fact not constructive. For example, consider a self-interested CEO who receives a bonus for hitting targets. This CEO may set a mix of easy goals (that she is sure to meet) and ‘what the hell’ difficult goals (that she does not plan to meet). On average, the goal levels may seem appropriate, but this mix of goals may generously reward the CEO (when she meets the easy goals) without motivating any additional effort when the goals are difficult.”
Goal setting and the consequent rewards strategy are closely intertwined. Your rewards strategy might be well thought out, meaningful and beautifully executed but if they are being handed out for the wrong goals, it will still be meaningless in the long run. Rather than taking the easy way out of boiling the organizations goals down to the revenue numbers and profit figures of billions of dollars, its time leaders spent more time establishing meaningful goals that are aligned with the long term interest of the organization and all its share-holders.
The alternative of continuing with status-quo on goals and incentives is a scary proposition. Already there are rumblings of real estate and investment bubbles building up in South East Asian economies as a consequence of the Fed tapering. Another large financial shock just might be the proverbial last-straw on the camel’s back. On the positive side, we might get a few more entertaining movies.
References and acknowledgements for this post:
‘In no one we trust’, Joseph E. Stiglitz, NYTimes, 12 December 2013, Goals gone wild: The systematic side effects of Over-Prescribing Goal Setting, Lisa D. Ordonez and others, HBS Working Paper, 09-083, Image used in this post courtesy of Free Digital Photos.