Pay for Performance Systems: Still Destroying Quality

Finding good people may be hard, but finding well-designed work systems for them is nearly impossible

Tue, 12/18/2012 - 11:25

The recent NFL brouhaha over pay for performance (Saints style) has seen a lot of media coverage. An ESPN fan poll finds coaches more to blame (by a large margin) than the players. In the business world, this is the equivalent of workers “accepting” practices put in by management—as if they had a choice.

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What is interesting to me about the NFL fans’ attitude is that the players should be exonerated because coaches (management) are to blame (43% to 7%). Are NFL fans giving players a free pass? No. However, fans seem to understand that players can’t be held responsible.

Businesses have been using pay for performance for years, and you would think that such longevity must mean that pay for performance works. Motivation is needed to create better performance, and this thinking permeates both management and labor. However, the evidence is that incentives drive behavior—the wrong behavior.

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Comments

There are way too few of these articles around these days. It seems we have forgotten or abandoned the lessons we learned from Deming, Scholtes, Alfie Kohn, et al. Thanks, Tripp, for keeping the flame alive.

Nice to see Tripp. I remember Dr Juran speaking to me in Australia way back in 1988 here at our quality conference about his original Pareto Rule aka '80:20 Rule' and how he and Dr Deming met and agreed they agreed on two things they got way off the mark: 1 they should have said 'Management Participation' not 'Management Commitment' and 2 "Joe you got it wrong my dear friend, it's not 80:20 but you and I as I acknowledge your fine work, that ist should have been '95/5'.

So your article is timely and sobering reminder to us all as we see the multi-billion fines to Transocean, Toyota, HSBC and failures of system designed, implemented and resourced to be maintained by corporations, that created 95% of the company problems. Yet as we find here in Asia Pacific, we still balme the work as Dr Deming would say in those Red Bead Experiments.

I find it a bit crazy in these days of Lean that we even have to say and implore management to 'Go to Gemba' - why do we need to even say this these days. Sad really, ah well, we'll all keep up the good work of Drs Juran and Deming. Timely article Tripp and a great 2013.

PS: That school teacher performance issue has much to draw from in a book called 'Freakonomics'

Yes, when one opens the Performance Pandora's Vase, anything can be expected but Good. Performance still equals Turnover, that is, the total sum of the amounts that a company or organization charges its customers for. Whether it will be paid or not, how much its customers - and supplyiers, including - first of all - the company's employees, "our most important resource" - is all but management's babble. There's a saying: Man has invented measures for Gold, but gold is the measure of man. Thank you.

Well put indeed. It made me think of another article which many might have seen, but since it is fairly old now, some might have missed it: "Six dangerous myths about pay" written by Jeffrey Pfeffer, published in Harvard Business Review in 1998. There are tons of both data and experience saying that our common pay systems are inherently flawed and detrimental to the system performance.

Robert Lundqvist

Mike and Dirk try to find a balanced approach to their show, however, the evidence does not support their view. If pay for performance has been around a long time, doesn't it seem that organizations would have found the right measures by now? What is wrong with paying sales people a salary rather than commissions? Commissions sub-optimize a system as much as bonuses. Customers absolutely pay the price being sold items that they don't need or that the organization can't support. Sales people walk away with the commission and the organization is left with the fallout. This is allowed to happen because management has to "hit their numbers" or targets. The entire system suffers a deep malaise. Yet, the practice continues. Sure pay for performance drives behavior . . . the wrong behavior. Focus is on the personal balanced sheet not the customer or organization. Organizations that can learn to study their organizations as systems can see for themselves the damage - if they so choose. Most ignore this system design flaw and it is one of many problems the US faces. I thank everyone here supporting this article. We have a lot of work to do.

Hi Tripp. It is true that we try to balance out opinions, sometimes we even play devil's advocate. But for me, not so much in this case. I do think pay for performance can work. Let's look at sales as an example. You say, go to salary instead of commission. Ok. Do that. I don't think you are suggesting that a salesman that busts his or her rear end and outsells other salepeople 2 to 1 should make the same salary, are you? You wouldn't keep salespeople if you did that, or they would all sink to the lowest common denominator (why should I work hard to make sales if the guy next to me slacks off all day and makes the same pay). No, the boss is going to give that guy a raise in salary. So although it isn't commission, it is still pay for performance.

So, what if, just brainstorming here, we didn't measure simply the number or value of sales. Suppose we also surveyed customers immediately after a sale and asked them qualitative questions about the sales experience (were you pressured? did the sales person try to answer all your questions? etc.). That survey data is then used to weight the salesperson's sales volume data. So now, it would be possible to have a salesperson who sold maybe only 80% of what the highest seller sold actually be valued higher than that top seller. Pay (whether commission or salary) would be based on that weighted scale. That kind of metric might lead sales people into a more customer-centric way of selling. Just spit balling ideas here, but I think you get the picture.

By the way. Along those lines, I was recently told that Nordstrom's sales people are on commission (I didn't know that), and yet Nordstrom is frequently lauded for the value of its customer service. It would be interesting to know what they are doing.

Just the same, great story Tripp. Keep challenging us to closely examine how and why we do what we do in business. That makes all of us better.

Tripp and I often disagree, but I am 100% with him on this one.

Here is an interview I did with a CEO who had salespeople on salary and they were doing just fine as a self-described "Deming company":

http://www.leanblog.org/2007/02/leanblog-podcast-18-eric-christiansen/

Daniel Pink's book "Drive" has a lot of great research and thoughts on how incentive pay robs intrinsic motivation and hurts creativity. He should have cited Dr. Deming in his book, but oh well. His new book "To Sell is Human" has stories of very successful software companies that don't have traditional salespeople or commissions, etc. They have salaried customer engineers who work with customers to make sure they have the right things they need (without selling stuff they don't need). 

Why would a salesperson "bust his rear?" It's called pride in work... a salesperson who does well might likely still get promotions and other things that make it financially worthwhile to not do the bare minimum.

I"m upset with the "pay for performance" trend in healthcare, which is causing a great deal of dysfunction and unintended consequences. It oversimplifies complex system issues to punish doctors for system performance. The trend toward rewarding doctors for "patient satisfaction" is leading to worse care because doctors are afraid to say no to patients now. 

http://www.ama-assn.org/amednews/2012/11/26/prsa1126.htm

Hi Mark, At the end of your comment you say "a salesperson who does well might likely still get promotions and other things that make it financially worthwhile to not do the bare minimum."

But isn't that pay for performance?

I do agree that some people may bust their rear just to do a good job.

--Dirk

Dirk - you have to decide how to promote people somehow... it's probably not going to be based on seniority or a popularity contest.

I wouldn't choose somebody to promote based on sales numbers or measurable job performance alone.

I'd bet deciding to promote somebody creates far less harm and dysfunction than direct commissions and sales incentives do. As Dan Pink says... sales incentives and extrinsic motivation WORKS. The problem is all of the dysfunction that counteracts the "good" that's done.

Quarterly financial targets and sales incentives caused great harm and dysfunction when I was at Dell in 1999-2001. It caused chaos in manufacturing and didn't serve the customer... 

Tripp is asking the right questions - why is one person doing better than another? There are lots of whys and system issues that aren't pegged to an indivdual.

Mark- Most of our disagreements are around method. Lean has missed the thinking boat in my opinion. We have bantered this for some time.

When doctors, nurses and other healthcare workers focus on rewards, targets and anything other than taking care of patients we have a problem brewing. There is a series of great articles my colleagues have written about their in engagement with the NHS in the UK. There is a 4-part series on how to approach healthcare.

http://vanguardinhealth.blogspot.co.uk

Dirk- In the spirit of the "got milk" commercials, I think before I comment that readers need to study their organizations as systems to get evidence in their own organizations. No amount of dialogue can replace what they find. But you must know how to look.

That written, I believe your scenario begs many questions. The question is "why" is one salesperson performing better than another or others? Did we hire the wrong people? Does the salesperson have better method? And if he/she does have better method would they share the better method with others or keep it to themselves to continue to receive the reward? A loss to the system. Unfortunately, I see manipulation by salespeople in my personal and professional experience - very rarely do I truly find better method. If a sales person discovers a better method, they should be rewarded/recognized as long as sharing the new method with others is part of the outcome. The real question is "why" someone is better . . . my point and Deming's is it is not down to the individual.

With regards to asking questions of customers about whether they were pressured (as you point out) or other manipulating prevention . . . isn't this just more waste? If the system is designed without the incentive for manipulation we don't need to ask these questions or conduct surveys. With pay for performance, we have to guard against manipulators which equals waste.

Further, the problem with surveys I can demonstrate with a recent engagement. When I listened to calls the customer was given a survey to get their NPS (Net Promoter Score). When we studied the system we found that despite a score of "9" (out of 10) the customer had had to call in multiple times to get what they wanted. The score did not reflect the actual performance of the system. Why would a customer give a "9" for bad service, we can speculate the reasons but the service was really not good. My point is surveys can be misleading.

Nordstrom . . . how much greater could they be if they used different method and understood their organization as a system? Food for thought.

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