Why clearly linking reward to your change program is harder - and easier - than you thought

Or "The meaning of meaningless gifts"

Incentives are a clear way to motivate behaviour change, right? Maybe not.

You've worked on business transformations in the past. You might be working on one right now, and I bet you've heard the words - nay, maybe even uttered the words:

"We need to change managers'
compensation so it aligns with outcomes from this change programme."

After all - we all know alignment of reward with the the big project you're working on is a way to help achieve clarity around the kind of behaviours you're after, right?

Well, in practice it's not so simple. And it's not so simple for at least two reasons:

  1. It's easy to get incentives wrong - because people are irrational, and

  2. It's hard to get compensation packages changed meaningfully - because it's hard.
This doesn't sound like encouraging news. Conventional wisdom and intuition both scream that you have to link reward to good behaviour. You HAVE to.

So what do we do?
More on that later. First, I want to explore why it's not as simple as it feels like it should be, and to give you some real-world reasons to pause if a fresh-faced, wet-behind-the-ears "change manager" comes to you with the textbook platitude that they'll overcome resistance by linking outcomes to managers' pay. Let's look at the reasons in turn:

1 - It's easy to get incentives wrong because people are irrational.
If not properly understood, this notion - that people are irrational - can be one of the most frustrating obstacles you'll come across. It's hard to apply common sense if people's reactions aren't going to follow rational rules, and there are plenty of examples that we don't:

Do you know anyone who will drive around for ages, lurking in parking gridlock just to find a closer space to "save time"? Can you imagine the person who falls into the trap of spending $3000 to upgrade to leather seats on their new car, but would struggle to justify the same spend on a leather sofa at home? (even though they'll spend more time on the couch than driving?) How about this one: Would you be willing to take a pencil home from work and then chuck it in the pen-cup next to the fridge or give it to your kids? If you're like most people, probably. I expect you wouldn't give it a second thought. But would you be willing to raid company petty cash or submit an expense claim for the same thing? Probably not. These examples come from a book called Predictable Irrationality, The Hidden Forces that Shape our Decisions, by Dan Ariely.

In his book Dan makes the point that people's actions can seem irrational - but in a predictable way, because we haven't always noticed that there is a distinction between Economic Transactions and Social Transactions. And this difference is very relevant when we're looking to influence behaviour and get people to do things:

Consider some more examples that fly in the face of traditional, rational textbook economics:

In Haifa Israel, the day care workers were having trouble with parents picking up their kids late. This meant that the care workers had to stay with the kids, keep the centre open later, miss their own
appointments and generally inconvenience themselves. So they got together at a meeting and decided they should link the desired behaviour (not being late) to an economic incentive. Behaviour changed all right. When they imposed a late pick-up fine, what do you think happened? The number of tardy parents doubled. Why? They had confused the social exchange of consideration for the outside lives of the day care centre workers with a commercial exchange. In effect, they told the parents that lateness, or extra time was a commodity they could get by simply buying it. So the parents did. In droves.

So that's an example of a penalty for bad behaviour backfiring. Can the same sort of thing happen with positive incentive?

Decades ago Richard Titmus (who founded the Social Policy chair at the London School of Economics) claimed that paying people to be blood donors reduced the numbers of people donating blood. At the time, rational economists refused to believe him. But now, experiments on this very subject and others have shown that social exchange and issues of signalling identity often override commercial exchange in motivating behaviour. In fact, offering to pay women to donate blood decreases the number of willing donors nearly in half. It tells them (like the daycare parents) that the commercial exchange isn't worth shifting their behaviour. However, make it an identity-related question, or a
social exchange (I am an altruistic person), and you can go a long way. (Letting the women contribute their blood donor fee to charity nearly reverses the drop in numbers.)

My favourite example from Dan Ariely's book though is this: What would your Mother in Law's reaction be if she invited you and your family over to dinner at her place, pulled out all the stops and cooked three courses' worth of your favourite meal - (with the roast vegetables on the side, and the nice sauces, and a beautiful pudding for afterwards), and when it was all finished, and you'd wiped the last drip of unctuous gravy from your plate with a bit of her home made bread, you pushed your chair back, pulled out your wallet and said: "Well that was lovely, Jann. What do I owe you?" How would that go over? Not well? That's the danger of confusing social with economic exchanges.

Dan goes through some of these examples in his short video below:

So. When you think about incentives to motivate change, are your stories and incentives focused on economic or social / identity outcomes? In a previous post (How to get Employees to care 22% More about your Change Initiative), I mentioned people probably don't care about your change for the same reasons you do. McKinsey Quarterly suggest there are at least 5 stories you need to be telling, and if you review the article, you'll see that most of them are more easily related to identity and social exchange than they are to commercial exchange.

So it's easy to get incentives wrong, because people are predictably irrational.

Now. Let's look at the second reason it's difficult to align reward with behaviour to motivate your change:

2 - It's hard to get compensation packages changed meaningfully - because it's hard.

To be clear, I'm not for a second suggesting that it's a good idea to ignore linking compensation to the outcomes of your change programme. What I am saying though are two things:

One, the link is probably at best a hygiene factor: If you have it backwards (people will be directly compensated for the wrong behaviour) you're in trouble, and if you don't have at least the notion of a link, it will seem incongruous and send a signal that the programme is not a priority. On the other hand, (and this is the critical bit) the research we're examining here suggests that the flip side is not true: Having a compensation link doesn't necessarily mean you'll motivate a behaviour change.

Two, getting a sufficiently meaningful link between remuneration and your programme outcomes to get people motivated and in the 'commercial exchange' frame of mind is not ever easy. In looking at an executives' pay package plan, there are two ways to approach it: Financial and non-financial measures.

The challenge with financial measures is that even if you can work the change impacts into budget forecasts, and even if you can get those forecasts to impact operating plans for the various business units, there are so many variables that contribute to the end review calculation that the link to your programme becomes weak at best. It's good that it's there, since you're not sending mixed messages by leaving it out, but the difference in Jane-the-executive or Bill-the-unit-manager's pay packet not going to move any mountains.

The challenge with non-financial measures suffers the same dilution problem: You might be able to make the label for your reward link really explicit, and in this way a non-financial measure may be better for your story than a financial one, but when it comes to impact, the diluting effect of all the other non-financial compensation variables (corporate social responsibility, sustainability, diversity, safety, staff turnover, employee engagement, compliance etc...) makes the financial impact of your particular incentive pretty much meaningless.

For a big enough programme, you could appeal to the CEO and the HR Director to change the way compensation is structured, but there's so much risk of unintended consequences. You wouldn't want to blow up people's reward for carrying on the rest of their business-as-usual functions, and a big compensation restructure would be so much work for what might not be the best motivator of behaviour that it's probably not worth bothering.

3 - So what can you do?

Well, you can treat people like dogs. And I'm only half kidding about that (and I definitely don't mean it to sound disparaging). Any dog trainer will tell you that the best way to train a dog is to concentrate on rewarding good behaviour. In a way, the same think can apply to your change program, if you deliberately take your rewards out of the realm of 'economic exchange" and place them firmly in the realm of 'social exchange'.

How do you do that? Spend less. (Result! Finally something you'll be happy to hear)

Surprising and delighting people with small, unexpected gifts has been shown to have an unexpectedly significant effect on people's satisfaction with their lives.

In 1987 two researchers named Schwarz and Norbert published a study where they gave people a very (very) small unexpected gift and measured the effect it had on them. Specifically, they had people do some photocopying, and half the people in the study found ten cents - a dime - in the machine. Then, when they asked all the subjects to rate how satisfied they were with their lives, those with the dime rated their lives - THEIR LIVES, mind you - a 6.5 out of 7. No dime people only gave their lives a 5.6. Why such a difference?

In their article The Inconvenient Truth about Change Management, Scott Keller and Carolyn Aiken suggest that for humans (and maybe dogs?) it holds that "satisfaction equals perception minus expectation." For you, trying to use incentive to change people's behaviour and make them feel more satisfied with your big, disruptive change programme, it means that you can get a disproportionate lift by using small, unexpected gifts as rewards, and critically, make sure your actions register as social exchanges rather than commercial ones.

And you won't be alone: Here are a couple of examples taken directly from the same article of those principles being put in to practice:

  • Gordon M. Bethune, while turning around Continental Airlines, sent an unexpected $65 cheque to every employee when Continental hit a milestone, and made it to the top 5 for on-time airlines.

  • The CEO of a large multi-regional bank sent out personal thank-you notes to all employees working directly on the company's change programme to mark its 5-year anniversary.

  • John McFarlane of ANZ Bank sent a bottle of Champagne to every employee for Christmas with a card thanking them for their work on the company's "Perform, Grow and Breakout" change programme. (And I bet your mother in law wouldn't object to a nice bottle of wine with a thank-you note for the dinner either, would she?)

Like the dime in the photocopier, the small, unexpected gifts worked. And the key is that instead of trying to go the hard yard of changing the formal employee compensation system to reward people by economic exchange, the small, unexpected gifts work because they're seen in the social realm.

A final example from Predictably Irrational has to do with people who are trained for years in rational, cause-and-effect reasoning: Lawyers. He writes:

The AARP (American Association of Retired Persons) asked some lawyers if they would offer less expensive services for needy retirees, at something like $30 an hour. The lawyers said no. Then the programme manager from AARP had the idea to ask the lawyers if they would offer services to needy retirees - for free. Overwhelmingly, the lawyers said yes. When compensation was mentioned, the lawyers applied market norms and found the offer lacking. When no compensation was mentioned they used social norms and were willing to volunteer their time.

Clarity Rule: Make room for unexpected little gifts in your budget. It's a much clearer way to link compensation to desired behaviour.
Greg Stewart

1 comment:

  1. These thoughts depend on "Homo economicus" theory.
    but this does not explain why a man would step out infront of a truck to push a pram out of the way, or why the physopath does what he does.

    Research show that economics students are more self-centered after their cources than before they took the course.

    This is the same with management.

    Economic incentive is not as important as social incentive - however the kind of people who are movitivated enough to get to the top of the tree and need to motivate others are them selves changed by their climb.

    Instead of the male command and control based economic culture the new corporation needs to look a female nurturing.

    Best advice for the manager -> keep it real, remember what it is that made you love the job.