Mark-Goodridge-OECamOn my shift in the Sheffield steel works my team were paid on piecework.  Each coil of wire, each roll of stainless steel strip had its price, a price for each work step in the process.  There was a basic wage representing around 50% of earnings, the rest was paid by the piecework scheme.  When things went wrong (as they often did) I was rudely reminded by my team that “they weren’t being paid” because they couldn’t earn piecework.  The base pay seemed to count for little except for turning up.

The only power I seemed to have as a shift manager was approving the “allowances sheet”.  This was the only means of getting any work done that hadn’t been measured for inclusion in the piecework.  The unmeasurable had to have a price too to get it done.  It was devilishly difficult to get any increase in performance.  Exhortations to do things differently, to resolve our quality problems fell on deaf ears.  I was told – “I get paid for what I do so what concern is it of yours?”

The arguments then reverted to how unfair the piecework rates were and how there were always half of them that underpaid (yes, because the other half overpaid them).

There were three consequences of this arrangement, firstly cost and quality suffered, secondly it was questionable whether output actually was increased and thirdly, the incentive scheme had the effect of handing over to the individual control over the performance of the work.  If I do more, I get paid more, if I do less then that’s up to me, I get paid less.

I spent my next job negotiating away piecework schemes.  I designed clever algorithms that paid for cost reduction and quality as well as output.  I thought this was a brilliant solution to the piecework problem.  Yet I soon realised I had set up a complex game of fiddles and trade-offs that maximised earnings (as did the previous scheme) with minimal performance benefits.

 

Piecework in Executive remuneration?

Today, many Executive payment schemes are frighteningly similar to those awful schemes I slaved over eliminating.  So called incentive plans for executives can deliver between 50% and 200% of base earnings.  We seem to be saying that senior managers require a greater proportion of incentive pay to get out of bed in the morning than my steelworkers?  Incentive pay for executives now exceeds on average 75% based upon a complex soup of measures.  It seems that we now have piecework in the boardroom.

Executive pay has grown considerably in a time of austerity and weak corporate performance and become stupidly complex.  Last year Executive pay rose by 11%, the average workers by 2.6% and the FTSE dropped by 15% [Sunday Times 25th September 2011].  The growth is largely because the measures have been maximised but the business has not.  Neither the “incentive” nor the “measurement” is working.

 

Align management motives with shareholder return motives – link and integrate, and all will be happy!” or so the theory goes.  It is very hard to replicate the simplicity and singularity of the investor’s interest in a business (shareholder return) for the Executives.  The fluctuations of share price are only partially influenced by company performance and hence the actions of the Executive team.  But even if we can make this a strong linkage (through longer term measures and total shareholder return) we are left with the “incentive” question.”

If Executives are motivated by their incentive plans then businesses are not well managed through economic levers alone, at best they provide a metric for establishing a distribution of gains.  The problem is that the side effects can be, and often are, toxic.

I find that we exaggerate the impact of pay as the primary motivator.  This  theory of motivation is just not borne out in practice – in the boardroom or the shop floor.

Daniel Pink in his book “Drive”  maps the rise and fall of what he calls Motivation 2.0 reward and punishment.  For me, this is the best summary of the somewhat limited research on the motivation effects of money at work that is available.

He looks at two different types of work, the ‘algorithmic’ and the ‘heuristic’.  Algorithmic is where the process is pretty well prescribed, yes there are decisions to be made, but they are through routinised paths that lead to a result.  Pay incentives seem to work quite well for this type of work.

The heuristic work on the other hand, is where there is no one right solution or  well-defined process to get there.  It requires assessing a situation on the basis of the facts to hand,  making judgements on incomplete data and having in mind a whole series of experiences and rules of thumb that help us decide.  Pink’s research concludes that pay incentives are quite unhelpful in these situations and in some cases, even make decision-making worse.  Senior executives work is almost entirely heuristic – so why are we paying them on piecework?

We have three compatibility problems with motivating executives through incentives.

Firstly, how we organise what we do.  20 years ago Microsoft made a major investment in creating an online encyclopaedia.  Its only competition (and I’m sure they would be insulted that it was competition at all) came from a rag tag army of volunteers that had created Wikipedia.  We know the result, but how many MBA students would have picked Wiki to win 15 years ago?  So who got the bonus here?

Secondly, much of our way of motivating people these days is around engagement, getting buy-in to visions, missions and values – to appeal to a common sense of purpose and endeavour, rather than the completion of a bit part algorithm.  So leadership courses are full of ways to help us become better at intrinsic motivation.  Intrinsically motivated ‘purpose maximisers’ rather than ‘profit maximisers’.  So, how does this fit with financial incentives that give Senior Executives much larger take-home pay increases?

Thirdly, Executive pay does not fit with the nature of the work that we do.  Senior management decision-making is not algorithmic, it is almost entirely heuristic.  So on the evidence we have, incentives may be counter productive.

We have ended up with a remuneration regime that is not fit for purpose.  It pays senior executives well, but it has lost credibility with both shareholders and the public alike.  I suspect that it has also lost credibility with many of those who are rewarded by such schemes.  Most of the Chief Executives I know are motivated by doing a good job, adding value, making a real difference.  That is what gets them up in the morning – rather than the promise of share options determined by a volatile stock market.

Change will not be easy, not least because the primary driver of executive pay is a series of somewhat spurious comparisons, rather than being based on some logic or rationale.

My ideal would be to:

  • Pay what an executive is worth (these are tough jobs     and need to be well rewarded)
  • Keep the variable pay to a max of 50% for brilliance, 25% for achievement and 0 for doing the job well.  Some of this based on shareholder performance, some on business performance.
  • Maybe on individual performance.
  • Rigorously performance manage.

A radical agenda.  One that will be difficult to implement, but one that will build greater credibility with shareholders and employees alike.

 

 


 

i  “Drive – The Surprising Truth about what motivates us” – Daniel H Pink (2010)