In a consulting gig today, I had yet another discussion on incentive pay. "Can we motivate these people stronger by increasing the bonus part of their pay," I was asked. I recommended to abolish incentive payments at all. There are technical arguments against it and more serious philosophical reasons.
Let’s start with the technical problems:
In its simplest form you pay the guy who makes the nuts more if he produces more nuts. You do the same thing with the girl who makes the bolts. The guaranteed outcome will be either too many nuts or too many bolts and more money spent than needed to make an equal and sufficient number of nuts and bolts.
In more complex knowledge worker jobs there are simply no measurable outcomes one could tie an incentive to. The number of lines of codes written by a programmer says nothing about the quality of the code or its long term maintainability (and costs.)
In one job I was told to better the productivity (value of output/cost of input) by 10% per year to increase my income by 10%, but the variables to do so, like moving the department out of an outrageous expensive office location, were out of my bounds. (The managing board of that media company also did of course not understand the mathematic limit value of "by 10% per year".)
In other situations there are general market interferences. You may well be the best in your trade and in an economic downturn the one who loses the least money. But most incentive pay systems will give you zero for achieving this.
The response to the above calamities is usually to make the system of benchmarking more complex. Lots of consultants make piles of money for presenting such fine tuning. But the inevitable outcome will be either totally confused and unmotivated workers or folks who start gaming a not supervisable system.
In a young company I was with, the head of the marketing department had his salary changed from fixed to variable to reflect the number of new subscribers he could bring in. Before the change he was quite successful in helping the company into a profitable realm. After the change the number of new subscribers per month soared, as did his income. A year later it turned out that most of these new subscribers left as soon as they could. The retention rates were catastrophic because the marketing campaigns were designed to maximize intake of subs, not to keep them once they were on board.
People who believe in incentives assume that money is the main human motivational factor. Rational people, they say, will always work more and work better if this leads to better pay. Essentially they think everybody is corrupt and they cite lots of examples to prove this point.
But that is not true. The fallacy here is to mistake cause and effect.
If one pays people a fair fixed amount for doing their job, they have no reason to game the system. To make them do a better job, some smiles, ice cream surprises on hot days and a bottle of good wine for Christmas will usually have the desired effect.
But as soon as you start to offer incentive pay you urge them to move away from doing a "better job" to doing a "more profitable job" – more profitable for them that is. This is planting the seeds of corruption where none need to be.
The philosophy behind incentive pay is that of humans as rational beings – rational understood in the very reduced sense of a homo economicus, a useful mathematical model for economic science theorists, but without much resemblance to living creatures.
Adam Curtis makes this point in a much wider sense in his new three part BBC series The Trap: What Happened to Our Dream of Freedom. He is on to something and I hope to have more on the thoughts he tells in future pieces.
Today the folks I talked to were not immediately convinced, but I did get them to think about the issue. The funny moment I needed came when I refused to make an offer for designing a "better incentive pay system" for them. I said: "such offer would only benefit me and deeply hurt your company." Somehow, that answer seemed to be unexpected.