Thursday, August 24, 2006

It's what we know that ain't so

In response to my post Sorry Jack, Jason Yip mentioned the book Hard Facts, Dangerous Half-Truths And Total Nonsense: Profiting From Evidence-Based Management.

I bought myself a copy and have been enjoying a good read.

Pfeffer and Sutton don't directly address the forced ranking program at GE; they do tackle the assumptions that underlie ranking, incentive pay, and other compensation system evils of our time.

I'll summarize some points that stood out for me.

Using $ to drive motivation assumes:

  • If people would only work harder, they'd get better results. (And they won't work hard unless we manipulate them with rewards.)

    That ignores the organizational systems, technologies, skills, and information flow as drivers for performance.

  • Money is the primary motivator for work.

    Most studies show that money is not at the top of the list for most people (unless everything else sucks, then it pops up to the top). Oddly enough, many people assume that others are motivated by money, even when they themselves are not. But why should other people be different?

  • More money/incentive systems will attract the best people.

    Maybe. Maybe it will attract the people who most motivatted by $ rather than the work, the culture, the values, the customers, and so forth. People who come for $ may leave for money, driving turnover. And some studies show that people who are mostly motivated by "instrumental reasons" (e.g., making more money) are more likely to cheat.

    Pfeffer and Sutton report that a colleague, James Baron, asks his MBA students if they had a serious illness and had to choose between two doctors, which they would choose: "a) a doctor who had entered medicine primarily to make a lot of money, or b) a doctor who had entered medicine because he or she was interested in the subject matter and had a desire to serve people?"

    Hmmm. Which would you choose?

    On to "pay for performance."

    "Pay for performance" relies on ranking or rating people and create stratification between "winners", "nothing specials," and "losers." The result is predictable. People resent each other, and become less trusting, and less collaborative.

    In most companies, the differences in pay are actually pretty insignificant. Think about it: Assume that a person makes $100,000 (for the sake of easy arithmetic). A 5% raise is $5,000. A 1% raise is $1,000. That's really not huge difference in actual dollars (considering the salary). But the perceived difference between 1% and 5% is huge, because it communicates how people are valued within the organization.

    In most companies, the real differences in raises are likely to be fractions of a percent, and manager spend days and weeks on ranking/rating and then dealing with employee's resentment.

    Is the supposed performance gain really worth the fallout?

    Pay for performance also assumes independent effort and clear outcomes. That doesn't sound like the software business.

    Pfeffer and Sutton refer to a study by Siegel and Hambrick published in Organization Science: "...the negative effect of pay disparity was especially pronounced for high-technology firms, because these firms had the greatest need for collaboration and teamwork to cope with complex and rapidly changing competitive conditions."

    Okay, enough challenging assumptions for one day.
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