The Key to a Successful Incentive Plan

In this week’s CBS Money Watch blog, I go after one of the biggest mistakes of modern management: incentive plans.  The vast majority of companies set incentives by looking at a goal, and then finding ways to pay people for successful implementation.  This approach seems obvious, except it’s completely backward, wrong, and all but guaranteed to backfire.

I use a Harvard Business School case in my classes to show the problem, about a group of orthopedic surgeons in Boston (MGOA).  It’s one of the rare cases in which people’s behavior changed, and stayed changed, over many years.  (There are later cases on the same group showing what happened over time, proving that it worked.)  Most seasoned executives jump right to the formula used in the case, and write that down as the key take away.  The formula is clear, focused on the problems with the group, and appears to reward the preferred behavior.  It’s easily transferred to their system.  Done.  Can we go now?

Yes, if you want things to go horribly wrong.  I’ve talked to many leaders in orthopedic surgical practice that hired an outside consultant to make them more profitable.  After some closed-door meetings, the same formula in the Harvard case is then presented to the surgeons in an email or PowerPoint presentation.  If every case I’ve heard of, it didn’t work.  People revolted.  Many left.  Others quit and stayed, which is far worse.  Some called for the ouster of the leader who implemented the new plan.  One person even questioned whether the data from Harvard is accurate, because his experience was so different.  (I have complete confidence these Harvard cases on MGOA are accurate, having spoken with people who were there at the time.)

So what’s the difference?  Two organizations, seemingly more alike than not, and yet the same incentive plan produced completely different results.

If people read the case slowly, they’ll see that the new leader in MGOA spent time making people aware of the financial problems in the group.  He encouraged others to “confront the brutal facts,” to quote Jim Collins.  As they did, he talked with them about what plan, including a new incentive system, might work.

I can cite 50 other cases where a new incentive plan has worked, and hundreds more were it hasn’t.  The key is to involve people in the right way.  Here are the steps:

  1. Understand the situation so well you’re able to talk about it with anyone, even someone who doesn’t have a background in finance or accounting.  While physicians are smart people, many don’t know how to read a basic financial report.  So rather than sending them something they’ll ignore, your challenge is to get them to see it for themselves.
  2. Learn how others learn.  My friend and colleague Devon Scheef has a brilliant tool for assessing learning style that can be completed in eight minutes.  It highlights whether people learn though interaction with others (“people learners”), trial-and-error (“action learners”), or through data (“information learners”).  Figure out how others learn, and then work with them, using their learning style, so they understand the situation for themselves.  Talk with people learners.  Send data to information learners.  Encourage action learners to try new approaches and see how it goes.  The goal isn’t to behavior change yet, it’s to have everyone see the situation, and the need for change, for themselves.

Once everyone sees the problem, at least in part, then talk with them about possible solutions.  In particular, ask the “Big Four Questions” from Tribal Leadership, focused on the incentive plan.  These questions are: (1) what’s working with the current pay plan, (2) what’s not working well with the incentive system in place, (3) what can be done so that it works better, and (4) anything else?

Have this conversation with enough people, and a common view will emerge that will even imply a new formula for calculating incentives.  The result may not be as elegant as what a consultant would tell you, but it’s much more likely to actually work.

Remember, as I wrote in Money Watch, that people behave according to how situations occur to them.  Using this approach to incentives occurs as collaborative, and respectful.  You, as the leader, will occur as participative and involving.  The resulting plan will occur as reasonable, necessary, and perhaps even beneficial for everyone.

When I go through this approach in executive sessions, the result is often outrage.  “Why don’t the consultants tell us this?,” they often scream.  The reason?  Consulting, by nature, is an “I’m great (and you’re not)” game.  If I come in and show you the secret sauce (i.e., the new formula), tell you it’s been tested across 100 companies just like you, I can charge you a lot of money.  I’m great because I know the secret.  You’re not because you’re uninformed.    (See more about “I’m great (and you’re not)” in this six minute video from BNET.)

The approach outlined here doesn’t need consultants at all.  It requires engaging leaders who understand why people do what they do.  You will need to make sure the resulting plan makes financial sense, but if your finance folks can’t do projections on something this simple, find people who can.  Thousands are graduating from MBA programs every year, and many would do it for you for free as a way to prove their value.

There are two cautions that are important.  First, assess your culture.  If it’s a “my life sucks” culture (what’s called “Stage Two”), this approach won’t work.  You have to get your culture to Stage Three.  You can assess you culture in two minutes here.

Second, after you implement the new system, institute a framework that gets quick progress through collaboration—two of the biggest factors in motivation I recommend Tribal Scrum, outlined a few weeks ago on Money Watch.  As people get closer to the point where the incentive plan will reward them, their collaboration and engagement will increase automatically.

And all this without consultants.  Go figure.

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