“We have to make sure our incentives are aligned with our goals.”
We talk a lot about incentives in our organizations. Incentives are things designed to motivates or encourages someone to do something. They are — spoiler alert — a fancy-sounding version of carrots and sticks.
Incentives may be monetary, such as bonuses and salary raises. They may be based on status, like promotions, “employee of the month,” or being called out in public by the CEO. They may also be coercive, such as imprisonment in the case of breaking the law.
To do incentives right, common practice dictates, there need to be clear and predictable rules. Ideally, metrics.
And where there are metrics, we invite creativity.
Creativity to game the system.
“Hey Zef, we’d like to increase your teams productivity. Now, we’ve quietly been tracking the number of story points your teams have been delivering, and recently those numbers have been quite stable. How about we try to increase productivity by 20% this quarter?”
“Productivity, or the number of story points?”
“Well, we’re tracking productivity through story points, so… story points.”
“Consider it done.”
The very next sprint our “productivity” measured in story points had increased 20%, or honestly — by whatever number we’d pick. It’s easy. Just increase your estimates, keep delivering as before, and done.
However, coming up with metrics for your incentives that are hard to game may be the least of the problems with incentives.
The obvious issue is that they are extrinsic motivators. And as mentioned in the previous chapter, extrinsic motivators eat away from intrinsic ones.
Let’s use incentives as another example to make this idea more intuitive in the workplace.
Let’s say I joined your company — good for you! If I joined your company, it must mean that I believe in your company’s vision. I’m a sucker for good visions. I believe your company is trying to do something valuable for its customers, and the world by extension. It has purpose. Purpose, or connectedness, as we’ve seen, drives a large part of intrinsic motivation.
Good start. I am intrinsically motivated coming in.
I join to manage some of your company’s teams. For some time, you let me do my thing. I try to think what’s best for the company’s customers, make sure the goals of the teams align with those as much as possible. I use any opportunity I get talking to teams and people to remind them why we’re doing this, and how it contributes to the bigger whole. This is how I try to spread this intrinsic motivation among the people.
Then, my 90-day review comes up.
“We’re so happy to have you Zef, things seem to be going in the right direction so far. Let me tell you a bit more detail about how we do things around here. First of all: your bonus. We set annual goals for our engineering leaders, and we decide the percentage of your bonus based on your achievement of those goals. Fair system, no? The annual goal for all engineering leaders this year is increasing productivity, and the target is an increase of 20%. We decided to measure this with story points!”
Joining your company I wasn’t specifically aware you had a bonus system. I tend not to care about that so much. I do care about salary, but only to the extent that I feel it’s fair. However, on our 90-day review, you make me aware of an incentive: your bonus system. And you attach a metric to it. Other than this is a rather silly and easy to game metric, it also communicates to me — yeah yeah, company mission blah blah blah, but this is what we really care about. This is how we will evaluate you.
What happens? I start to focus on that metric. Whenever I have a grooming session with my team, where previously I’d focus on making sure we build the right thing, and build it right, there’s now this productivity metric in the back of my head. “How are people estimating these tickets, and how will that add up to story points? Is it high enough, should I nudge things in a certain direction?”
Silly as this particular metric may be, any such metric will distract. There is opportunity cost to everything.
This starts to eat away on me. Especially as people around me talk a lot about their bonus. “I got this much last year!” “Oh, I got that much — I wonder what I’ll get this year!” Bonus, bonus, bonus.
Then, I meet Earl. Earl has been with the company for over four years already. Sadly, Earl is bored and not very engaged. In my 1:1 with Earl I understand he’s more or less in a dead end at the company. He has been in the same role for some time, doing the same type of work, and for his particular skills there’s not much opportunity in the rest of the company. Is this really the place for him still — I wonder? It’s ok if it isn’t.
I mention Earl to to a colleague manager. “Ah yeah, he’ll probably stay here for another half year or so, then he’ll leave.”
“Why?” I ask. “Then his shares will have vested fully.”
Another incentive: try to keep people in the company, by giving them shares in the company that vest over time. The longer they stay, the more of those shares they can keep. The result: Earl, a disengaged employee sticks around to make sure he gets his money’s worth. Not underperforming enough to fire, but still sticking around demotivating his team.
Thank you, incentives.
What is the alternative to incentives?
This is not our first rodeo. Incentives are external motivators. What we need to do is two-fold:
- Drop the extrinsic motivators
- Reinforce intrinsic motivators
Which in this context translates to:
- No more incentives
- Redirect energy saved through (1) to reinforcing the company’s purpose
What would we lose if we stopped using incentives? Well, first of all it’s scary, because incentives is how we’ve always done things around here.
In a sense we’ve been fairly lucky in engineering as opposed to e.g. sales. Incentives are not as prevalent in engineering as in other industries. Probably the reason is practical: it’s just so hard to measure productivity and success in engineering. That’s why my example of using story point as a productivity measure was somewhat contrived, no right mind would attach a bonus to a metric like story points, right? Right?
But in fact, I’ve seen all types of elaborate incentive systems put in place that are not engineering specific. Bonuses based on a complicated mix of achieving personal goals, company goals, and performance ratings. Shares that vest over time to get people to stay in the company longer. Money paid for referrals for new new hires.
Do they work? Some. Do they have only desirable effects? Hardly.
Bonuses based on “performance” I have yet to see having long-term positive results. As discussed in “No More Rewards” — there is ample reason to believe such incentives do not work.
Having shares vest over time for sure will keep some type of people stick around longer. Are those the type of people you want to keep around?
Paying money for referrals for new hires works as well. They work on people that are motivated by money, likely referring their friends with similar life priorities.
And since these are extrinsic motivators we have to ask two additional questions:
- Can you sustain them long term?
- What are the costs?
As to costs, there are at least two:
- Opportunity cost: time spent by HR and management developing and iterating on these systems, but also in implementing and operating them. Some of these require excessive amounts of evaluation performed by biased humans, calibrations of those evaluations, etc. These costs are significant.
- Intrinsic motivation erosion. If we incentivize people to keep running after the next bonus, the next carrot, do we not turn them in compliant zombies over time?
The costs are high, the upside highly doubtful.
Let’s stop this madness.
No more incentives.
Reinforce the Why
Dropping our elaborate incentive schemes gives us back a lot of time and money.
However will we we spend it!?
How about reminding people why we are doing all of this? The company I mean — why the company exists. Remember the company, or were you distracted by the incentives?
How about sharing stories about how your company’s work is affecting your customers’ lives?
Since we saved some of our bonus budget, how about taking people on a road trip to a customer, and letting them experience first hand how they use your products?
This is an investment in your people’s intrinsic motivation, in their connectedness.
This is all pretty damn radical. You can’t do something like that!
Fair enough. You may not be in a position to throw everything overboard. Or maybe you are, but it’s just too scary. Or perhaps you operate in an environment (with competing employers) where everybody else does offer incentives, so if you don’t… you may have trouble getting people to join your company. Although what type of people… You know what I’m going to say.
Fine. Let’s be pragmatic about this. This does not need to a binary thing.
A few ideas.
If you are not in a position to remove incentive programs, you can at least deemphasize them. Don’t focus on them too much. You can mention they’re there, but not hold them up as a carrot. No “we should really complete this project, because bonus!” but “we should really complete this project, because purpose!”
Related to that latter point: hammer purpose. Purpose, purpose, purpose. This is who we are. This why we do what we do. This is why it matters.
And last, if you are involved in developing new incentives, raise awareness of the costs and risks. First, do no harm. It’s conceivable there are valid reasons to introduce an incentive, but explore every avenue to come up with alternatives and prepare to pay the cost down the line. No incentive is free, and likely money will not be the biggest cost.