Harmful incentives and annual appraisals

by Edward Henkler on February 18, 2014

Incentives are great…when they workHow many sports stars have failed after receiving a big contract?  The common wisdom is that they become complacent or even lazy.  While that is certainly possible, I would posit a different cause.  Some athletes are sufficiently narcissistic that they may be unaffected but I suspect that most athletes feel increased pressure to deliver when they have a big contract.  Few athletes perform better when they’re tense, which is quite different from channeling nervous energy.  There can also be a negative team dynamic.  Athletes work extremely hard to reach the pinnacle of their sport putting in long hours of training and sacrificing other activities which their peers consider part of growing up (you can fill in the details).  Knowing how diligently they’ve all worked, do you think there might be a bit of envy when the star pitcher or quarterback receives an annual salary which might be ten or even twenty times the compensation they’re receiving?  I suspect the answer is a resounding “Yes”, especially if the star’s performance is anything less than perfect.

Inecntives - Equal treatment

The Big Winner – do you think anyone else might want a share?

How can this dynamic be changed?  I believe that incentive-laden contracts, which offer rewards based on performance that year might change the situation significantly.  Start the year with a more modest initial salary which increases based on the player achieving agreed benchmarks.  You could also include a team component or “kicker”, which provides a % increase based on how the team performs.  If you really wanted to break the mold, perhaps the “kicker” should be a fixed cash amount which is equal for all members of the team since it is a team-based reward.

Since most of us will never manage a professional sports team, you may wonder about today’s topic.  The answer is that I think we could take a similar approach in the business world.  At the end of each year, you could provide everyone with a salary increase and bonus based on company performance.  I’m not sure if you could go to a fixed dollar amount for either or would continue to rely on a fixed percentage but it would be solely based on the overall company performance.  With large companies, you might also include a Divisional breakdown.  Stellar performance and overachievement would then be recognized when it occurred, without regard to time of the year.  That would directly link individual or team performance and reward.  It wouldn’t force us to pick winners and losers at the end of each year nor would it restrict us as tightly to a fixed bonus pool.  It might also reduce the favoritism that so often arises with the annual appraisal process.

What do you think?  Does your company have an innovative approach?

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