A dogma called High performance culture : When Pay-out not Performance is managed - Part 3

Over the last 15 years, performance-linked rewards have come to occupy the sanctum sanctorum at the temple of ‘high performance culture’. In this post, I intend to challenge the pedestal this proposition is placed on.

To do that though, we need to first step back and understand how and why it evolved.

FW Taylor, Henry Gantt and Harrington Emerson, pioneers of scientific management, were among the first to propose that when incentives are offered, people will perform better. They argued that it made little sense for people to put in voluntary effort in an industrial world perceived as exploitative.

A century later, we continue to place faith in their propositions. What has been conveniently overlooked is a key part of their assertion: “Discretionary performance is withheld in an adversarial relationship”.

Early behavioural economists were convinced that rewards expanded effort. It makes people try harder and work longer. But no one has proposed that ability expands when incentivised. Sure, people learn new skills when they feel motivated. But rewards and improved skills have no relationship. Skill improvement is actually a function of orientation, practice and nurturing.

BF Skinner, a behavioural psychologist, established through his experiments that positive incentives reinforce desirable behaviour, while negative ones extinguish the undesirable.

But in the Taylorian world, the struggle between capital and labour, the two dominant factors in any economy, was intense. Labour often felt cheated by the disproportionate share of wealth capital-providers kept to themselves. They argued that if labour didn’t contribute, capital would remain idle and would not create any surplus. Capitalists argued the other way around.

Labour tested this stalemate by withholding discretionary effort. It led to diminished capital productivity.

Taylor stepped in at this point 150 years ago and broke the deadlock. In his book “The Principles of Scientific Management”, he proposed performance-based incentives. It meant a share of the economic surplus that could potentially be created through deployment of discretionary effort on the part of labour and can be scientifically determined. He anchored this on “work measurement” to determine what “standard output” is. This, he argued, ought to convince labour they are not only getting their share, but the logic is transparent, and hence, not exploitative.

Early management gurus conveniently appended Skinner’s arguments with Taylorian principles and asserted that the bedrock of superior performance is disproportionate rewards to a few who outperform the rest.

Then, around 60 years ago, a new class with a new title was born: Managers. They had no adversarial relationship with owners. These friends and agents of owners now wanted their share of the spoils. Thus the “performance-linked incentive or bonus” made its appearance on the scene.

Owners found this interesting. It made what otherwise was a sunk, fixed cost, a variable one. This gave them the flexibility to turn the tap on and off depending on the wealth these managers created. If we put all of these together, the following emerges:

·      Labour incentives released discretionary effort and did not improve ability.

·      Management incentives economised and made payouts variable.

That said, no connect with performance could be established. Thus, in either case, incentives or say bonus, have no leverage to expand ability. Let us put this to test:

·      How much faster does money make an athlete run? Will money or other rewards make any of us breach the 10-second mark in a 100-meter sprint given that it is now par for course for humans?

·      Pick 100 children in Class VIII or IX, who are average in math. Choose any incentive of their liking. How many of them and how much more do you think their math ability will improve?

·      Pick five managers in your organisation who have difficulty in conceptual and strategic thinking. Incentivise and observe whether they have improved substantially in these abilities.

·      Pick up 500 average sales personnel. Incentivise their performance. Methodically document and find how many and how much have they improved above established standard performance.

We can construct 100 more such experiments. The result will be no different from what Dan Ariely, psychology and behavioural economics professor at Duke University, USA, established with an experiment he conducted at Madurai in Tamil Nadu. He found no relationship between incentives and performance enhancement, when there is no withholding of effort.

He also found performance cannot consistently exceed anyone’s ability, and that when incentives were disproportionately higher than one’s ability, it created anxiety and diminished performance. It actually pushed people into cheating.

Though the last decade has amply demonstrated what incentives do to otherwise perfectly ethical and rational people, we refuse to be convinced. Think of Enron, WorldCom, and the 2008 financial crisis.

In his book “The Dirtiest Race in the History”, sportswriter Richard Moore recounts what happened at the Seoul Olympics. He quotes Charlie, the man who coached the now infamous Ben Johnson. Charlie told Moore that anybody on the track that day and not on performance-enhancing drugs were at least a full stride length behind. Skeletons have tumbled out of the closet in sport after sport. Incentives like fame turned out to be the primary driver to cheat. Lance Armstrong confessed to this recently.

Don’t these experiences tell us that rewards do not expand human ability, physical or mental? So why persist with this illogical belief?

I guess it is because the model is now a ‘payout management system’ and not a ‘performance management system’. It also helps bosses play god, favour some and punish others. It also shifts responsibility on the performer, because now the boss can say, “Since I pay you more, you find the way.”

We all participate in and perpetuate this charade. Our new emperors and their courtiers will want us to believe in the old saying: “A living elephant is worth the weight in gold, a dead one as much too.”

Look at investment banks. In a bad year, incentives are meant to retain people. In a good year, it is to reward and retain them. Where does performance fit into all of this? Curtailments on bonuses are never proportionate to the shortfall in performance. But the reverse is true.

That compels me to conclude that incentives and performance bonuses prod people to work harder and longer. But it seldom enhances ability or improves performance.

The thoughts and opinions shared here are of the author.