Incentives are the corporate equivalent of Vitamin C

24 September 2013, Bernard Swanepoel

Just like the research disproving the efficacy of Vitamin C’s supposed health benefits, there is an overwhelming body of research proving that incentives and especially bonuses are not quite doing what we expect of them. And yet just like vitamin C, we continue to “take” them, just in case!

Personally I don’t like incentives, not even when I am on the receiving end of them!

Years ago, long before I had even read ‘Fooled by Randomness’, before there were public disclosures and therefore public outcries against the vulgarities of executive bonuses, I declined an exorbitant bonus (or at least part of it) that was ‘arned’ according to a very clear formula, approved by the board, etc., which had not accounted for the external (random) factors impacting on the company and my ‘performance’ as the CEO!

In hindsight, I must admit, I do regret it. As with all decisions driven by fanaticism, there was a bit of naive ignorance underlying my well-intentioned decision. Yes, I lost out on some money, (in those days a small fortune!), but even worse, I didn’t spend any time whatsoever thinking about my decision’s impact on others:  the rest of my team at the time, the organisation as a whole. None of that mattered, I was fanatical!

Looking back, I can honestly say that I have never done anything specifically because of a monetary reward or incentive. During my very first month as a miner I received a R10 voucher as a safety reward. Imagine: not killing or hurting anybody in my team for a month entitled me to go and buy a kg of fillet at the local butcher in Springs!  It felt all wrong! Would I have not done my job, or would I have done it less well had I not been incentivised? This has always been my problem with incentives – the implied insult that I would not/will not give of my absolute best, unless paid for it!

So what are monetary incentives supposed to achieve? Well researched and well published by the academic fraternity is the finding that incentives only work for menial, basic work that is boring and repetitive. Sounds like labourers and piece workers should be the only ones getting them.

What’s more, research has found that incentives don’t enhance happiness, creativity, commitment or any other objective measurement of individual or team performance. Instead the opposite is true. They kill creativity and turn fun activities into chores. I would bet that in any honest organisation, employees would admit that monetary incentives are actually a major cause of dissatisfaction and unhappiness.

So why then don’t we stop such foolishness? Well, there may be merit to the argument that at the bottom of the organisation incentives may work and certainly make a critical difference to employees’ livelihood. At the top it is quite another story! Incentives are the corporate self – enrichment equivalent of tenderpreneurship. Maybe we should simply call this “execupreneurship”. We grab because we can. Public disclosure means that we all know who makes what (and who has made more than us) and this figure has become some perverse metric of our worth as individuals. Everybody knows somebody in their own or a competitor’s company who makes more than them: the result?  No one is ever happy… we all want more than the next guy (or girl).

It gets bizarrely out of hand: how does a bank executive justify earning a couple of million Rand a month, (the equivalent of a few hundred thousands every working day), when other people in the same organisation can’t earn that in a year. Are they really that much cleverer or more important? Executive incentives are like gambling with the House’s money. No downside and unlimited upside. But why would the rational providers of capital allow this? Well, they are in on it as well. It is not their money either. The aggregators of investor’s money are incentivised by their own set of rules, without taking any real personal financial risk or providing any capital. It is such a no-brainer way to become a millionaire at a young age that smart people who should be starting businesses are all rather making fortunes allocating capital.

At least let’s recognize that we are all in it together. As one fund manager in New York once famously told me: “I won’t sleep at night if I don’t know that your incentives are aligned with mine.”  I am not sure that is what I want to sign up for.

So in conclusion, if you do “do incentives”, perhaps you should treat them like vitamin C… take “them” but don’t forget the real medicine: leading and motivating your people in more sincere and sustainable ways.