Organizational Rewards: Practical, Cost-Neutral Alternatives That You May Know, but Don't Practice

Companies will benefit from rapid, inexpensive, dramatic improvements in their reward systems from practice of nine principles.

Organizational Rewards: Practical, Cost-Neutral Alternatives That You May Know, But Don't Practice

STEPHEN KERR

his article is about organizational Principle 1: Rewards should be the third T rewards. It will not suggest how to spend thing an organization works on; measure- additional money you probably don't have, ments should be the second; clear articulation but it will present some principles that will of desired outcomes should be the first. help you identify cost-neutral alternatives to Principle lA: If you think you have a your organization's current reward practices. rewards problem that can't be solved, you're I predict that you will agree with, and wrong; the problem is with your measure- probably already know, most of what is pre- ments, because anything that can be mea- sented. Yet, paradoxically, I also predict that sured can be rewarded. if you look into the matter you'll discover that Principle IB: If you think you have a mea- your own organization's reward practices are surements problem that can't be solved, you're inconsistent with much of what is presented. still wrong; you haven't defined and opera- Finally, I predict that if you are in a position to tionalized what you're trying to accomplish. do something about it, and do decide to do something about it, you will benefit from rapid, inexpensive, dramatic improvements in your reward systems, and in the levels of LINKING REWARDS effort and motivation of your people. TO MEASUREMENTS To some extent, this article is also about the Rewards are an easy thing to persuade organi- future. Despite often-expressed truisms about zations to care about. Reward system consul- the pace, scop>e, and discontinuous nature of tants are eager to describe any number of exdt- future changes, there are stUl some fairly pre- ing new incentive and profit-sharing dictable things that can be said about information plans—^none of which you have, but all of which technology; global trade and sources of labor; your competitors are apparently about to organizational hiring and outsourcing practices; install—followed by an offer to help get your and demographics and other societal trends, and reward system ready for the twenty-first cen- their Ukely consequences for the successful tury. Such consultants are usually well received. implementation of organizational rewards. Only the most conscientious among them 61 will tell you that you shouldn't upgrade your reward system until your measurements are reliable. These consultants are usually not well received because, if your organization is typi- cal: (a) you've already revised your performance management/ assessment/ appraisal systems more than once in recent years; (b) people seem to hate the new system about as much as they hated the ones before; so (c) nobody is interested in suffering through yet another revision of measurements. Neverthe- less, it is essential that measurements be reviewed, and refined if necessary, before tin- Steve Kerr is Vice President of Corporate kering with the reward system. Leadership Deveiopment and Chief Learning Here's an illustration of what starting at Officer for Generai Electric, inciuding responsi- the wrong end—with the reward system—can bility for GE's renowned leaderehip education do. For many years, one of the world's largest center at Crotonviiie. He was previously on the insurance companies had a mediocre system faculties of Ohio State University, the Univer- of rewards and measurements, of which one sity of Southern California and the University of element was that high performers received Michigan, and was Dean of the Faculty of the very small annual salary increases, and people use business school from 1985-1989. whose performance was unsatisfactory got Kerr is a past-president of the Academy nearly as much. Fortunately, the poor mea- of Management, the world's largest associa- surements did not induce employees to tion of academicians in management. His behave in dysfunctional ways: The rewards writings on leadership, "Substitutes for Lead- were too insignificant. Unfortunately, the firm ership" and "On the Folly of Rewarding A, decided to improve its reward system before While Hoping for B" are among the most cited attending to measurements and thus suc- and reprinted in the management sciences. ceeded in making its rewards more powerful Among his recent publications are The and attractive. This hurt rather than helped the Boundaryless Organization (Jossey-Bass, company. Many employees established sub- 1995; coauthor); "Risky Business: The New optimal priorities and began to engage in dys- Pay Game" (Fortune, July 22,1996), and Ulti- functional competition and to play games with mate Rewards (Harvard Business Schooi the numbers: It was now important to look Press, 1997; editor). good on the (still bad) measurements. Recent interviews with Kerr have been As another example, you may recall that published in Fortune {November 13, 1995), early in President Jimmy Carter's term of office, The New York Times (February 4, 1996), he decided it would be a good idea to install a Forbes ASAP (Marcti 10, 1996), Organiza- merit pay system in the Federal Civil Service. On tional Dynamics (Spring 1996), Index Review the other hand, you're forgiven if you don't (3""^ Quarter 1996), Investor's Business Daily recall this bit of Americana because the idea (November 19. 1996), Human Resource went nowhere—not because it was a bad idea Executive (February 1997), Organization Sci- but because it immediately became apparent ence (May-June 1997), and /nfranef (August that no measurements existed to determine 1997). He has also appeared on ABC, CBS, which Civil Service employees were performing CNN, NBC, PBS, and cable and local (Los meritoriously. President Carter didn't break the Angeles) TV. measurement system; they're never was one. In general, measurements should be thought of as comprising the base of a pedestal whose job it is to support the weight 62 ORGANIZATIONAL DYNAMICS HOW JO OPERAJIOmUZE A MISSION OR AN miAJfVE In GE's leadership center, Crotonville, we make frequent use of an exercise based on a valuable concept that has become known by many names over tfie years, inclLtding visualization; backward imaging; and most recently by Covey, "starting with the end in mind." We ask our students to imagine themselves at a party six months or a year from now, the purpose of which is to celebrate the achievement of some mission or corporate initiative. We ask them to describe. In very specific terms, how their leaders', peers', and subordinates' behavior has changed—what they are actually doing more of and less of—in the future compared to now. We use this process to ensure that our vision and mission statements are operational, rather tfian being merely sweet words or numbers. This makes it possible to determine whether we have true buy-in, and enables us to articulate roles and responsibilities for all employees in support of the mission, We then test whetfier the behaviors we have identified are currently measured. For those that aren't, we devise mea- sures, because we know that any behavior that isn't measured can't be systematically rewarded, which means there's a great chance it won't occur. Through exercises such as these, we teamed in GE that even such Impossible to measure" concepts as empowerment, Work-Out, and boundarylessness could be measured and rewarded, but only after we became sufficiently clear in our own minds what we were trying to achieve. Only then could these concepts be articulated in actionable, operational terms. of the reward system. The more attractive an occur, performance wil! prove extremely diffi- organization's rewards, the more weight the cult to measure and, therefore, to reward. See measurements will be asked to bear. the box entitled "How to Operationalize a Mis- sion or an Initiative.") Third, expressed in such general terms, such statements don't differenti- ate the mission or vision from anybody else's. LINKING MEASUREMENTS By way of illustration, sometimes when I TO DEFINITION teach in university executive programs, I ask Principle IB posits that anything that can be participants to place their organizations' vision defined can bie measured. However, this is only or mission statements in a shoebox. I then say, true when desired outcomes are defined in "I'm going to read one of the mission state- operational, actionable terms rather than mere ments. If it's yours, raise your hand." I read the sweet words ("We want to be the best business first one and a good number of hands go up, in the whole wide world") or numbers {"We will including people from an airline, a pharmaceu- become a billion dollar firm by the year 2001"). tical firm, a plumbing supplies company, and Although these two examples ("be the best the U.S. Coast Guard. If I'm feeling sadistic that business" and "be a billion dollar business") may day, I also ask participants to estimate tlie num- seem to reflect very different approaches to ber of senior management hours that went into articulating a mission or vision, they share three the statement's preparation. These numbers are fundamental limitations. First, since it is impos- often mind boggling—175; 300; 500—yet the sible to oppose statements of this kind, no one statements tend to be so similar that most peo- will oppose them, making it impossible to dis- ple can't distinguish their own from others: tinguish between true and pseudo-buy in. Sec- If you've operationally defined what you ond, such statements fail to make clear what want and still have trouble measuring it, you each employee can do to support the mission. should employ an excellent tool that is proba- While senior executives will probably figure it bly already in use somewhere within your out, the real proof that a definition is operational orgariization—360-degree appraisal. This tech- is that supervisors and other low- and mid-level nique enables performance data to be gathered workers understand its implications for their from peers, customers, suppliers, and others own tasks and responsibilities. If this fails to who will be impacted if the goal, mission or ini- 63 dative is accomplished. If none of these people and lower-level employees to aspire to higher can tell whether you've achieved it (or are pro- office. Therefore, such attractive rewards as gressing toward it; sometimes lead indicators large salaries, profit sharing, deferred com- must be identified), then either you really pensation, stock grants and options, executive haven't operationally defined it, or you should life and liability insurance, estate planning be asking yourself why you think you want it. and financial counseling, invitations to meet- In summary, when a problem seems to be ings in attractive locations, and permission to rewards-related, organizations should first fly first class or use the company plane, are ensure that they have operationally defined typically made available only to those who performance, then ascertain that their mea- reach the higher organizational levels. Do sures reflect their definition. They will then be such reward practices achieve the desired in a position to address their reward system results? In general, yes. Residents and interns problem—although by then they may realize work impossible hours to become M.D.s, that the problem wasn't really about rewards junior lawyers and accountants do likewise to at all, and has inadvertently been solved. become partners, assistant professors publish Principle 2: If a reward is unavailable, so they won't perish, and Ph.D. students per- don't try to use it. form many chores that are too depressing to Principle 5: If you make people ineligible recount here to obtain their doctorates. for a reward, you take away their motivation However, as we look toward the future, to strive for it. the idea that large numbers of employees should be induced to lust after the top-level jobs is fast becoming counterproductive. AVAILABILITY AND ELIGIBILITY Numerous organizations have been delayered and downsized in recent years, leaving them Having examined the linkages among defini- with fewer positions at the higher levels. Con- tion, measurement and reward, let us now consider also the demographic influence of the sider some of the characteristics of rewards "baby boomers" and those who followed themselves. First let's look at the most basic ele- them. These employees are now at the age— ment of any reward—availability. It should go late forties and early fifties—when they might without saying that if you don't have some- reasonably expect to gain access to higher- thing, you shouldn't try to use it, but this prin- level rewards. This circumstance of increasing ciple is violated all the time. Organizations with numbers of mid-level, middle-age employees virtually no money to give often spend count- chasing decreasing numbers of executive posi- less hours rating, ranking, and grading their tions will create an unhealthy tension that, if employees, thereby wasting time, raising unchecked, may produce an entire generation expectations, and ultimately dispensing such of what has already begun to be labeled the meager increases that management is embar- "POPOs"— Passed Over, and Pissed Off. rassed and employees are disappointed. My Two additional factors argue for the princi- point is not that financial rewards aren't valu- ple of eligibility. First, when you make people able; rather, if they aren't available, it's wise to ineligible for a reward, you take away their accept that fact and go on to other things—in motivation to strive for it. For example, in most particular, to greater use of nonfinancial state lotteries the odds against winning are rewards, about which more will be said later. huge, yet millions of people buy tickets. Now Rewards are often made unavailable by suppose it was announced that people named factors that are beyond anyone's control. (For Smith were ineligible to win; that is, from then example, since urxiversities are almost never on if someone named Smith had the winning incorporated, deans normally cannot award number, another number would be drawn. stock options.) Eligibility, on the other hand, is How likely is it that anyone named Smith almost always intentional. Organizations would buy a ticket? The point is that even have traditionally sought to motivate newer though offering people one chance in a million

64 ORGANIZATIONAL DYNAMICS is virtually the same as offering them no chance VISIBILITY at all, it generates entirely different mindsets and patterns of behavior. Awarding stock First and foremost, rewards should be visible options to even a few previously ineligible to those who receive them. Most rewards are employees, for example, or inviting a mere visible to recipients but not all. For example, handful of non-executives to the executive investigation of its high turnover by a large retreat, will dramatically alter lower-level Detroit firm revealed that people were actually employees' perceptions of these rewards, and leaving for inferior packages. The problem was their motivation to try for them. (However, as that the firm's benefits were described in such mentioned previously, whether such an actuarial doubletalk that even the recipients increase in motivation is beneficial or harmful to had little appreciation of their value. The solu- the organization will depend on whether tion was to create a cartoon booklet that, for desired outcomes are competently defined and the first time, enabled employees to under- measured. Offering stock options to thirty peo- stand how much their benefits were worth. ple may cause thirty thousand people to wonder As another example, some of the why they didn't receive any. Thaf s why it's so employee benefits at a university I once important to address definition before mea- worked for were non-contributory. Since surements, and measurements before rewards.) there were no deductions from salary, there Second, when you put people in different used to be no entry on the pay stub to show categories, you give them a different perspec- employees what the university paid each tive, a different point of view. In today's month on employees' behalf. All it took was a increasingly diverse organizations, rallying simple computer change to make these pay- workers around common priorities and ini- ments visible. tiatives is hard enough without further subdi- Ideally, rewards should also be visible to viding employees into exempt vs. nonex- other employees besides the recipient. If a empt, union vs. nonunion, full- vs. part-time, special stock grant is awarded to a high per- permanent vs. adjunct, tenured vs. non- former, for example, but no one else knows tenured, and other artificial distinctions. about it, the number of motivated people is Looking toward the future, organizations somewhere between 0 and 1—not an effec- that understand the principle of eligibility are tive use of organizational resources. beginning to dismantle some of the connec- Of all the principles of effective rewards, tions between rewards and hierarchy, to help visibility, particularly where money is their employees see that they can reap attrac- involved, is the one most often violated. tive rewards and have good careers without Other than public sector organizations that necessarily reaching the top rungs of the orga- are required to do so, almost no firms publi- nization ladder. For example. General Electric cize their disbursement of financial rewards. has sharply expanded its eligibility criteria for This is true even though research has shown stock options, has gone from narrow to wide that when employees are asked how they're banding (from 29 pay grades to 6), and is exper- doing vis a vis their colleagues, they almost imenting with such things as knowledge-based always report being worse off financially than pay, dual ladders, and horizontally focused they really are. careers, in which employees progress to The principle of visibility is equally appli- increasingly central positions within key orga- cable to nonfinancial rewards. Many rewards nizational processes without necessarily mov- that have no monetary component—for ing upward. Some of these techniques will example, inviting a team to share their ideas undoubtedly prove more effective than others, with senior management, or recognizing an but all constitute ways of distributing rewards employee's contributions outside her home without relying on hierarchical advancement. unit—are usually much more powerful if they Principle 4: For rewards to be powerful, are made public. they must be visible. Principle 5: If you want someone to per-

65 form, you should reward them when they do Not only does such a system under- perform and not when they don't. reward your best workers, so it doesn't say Principle 5A: A good reward says thank thank you for the past, it also fails to invigo- you for the past, and invigorates the future. rate the future, alienating those who are most Principle 5B: Most human beings make able to find employment elsewhere. rotten martyrs. Although organizations never intend to Principle 5C: Never hurt your high per- hurt their high performers, the effect of many forniers. policies is to do just that. For example, across- the-board budget cuts are taken in stride by the corporate politicians (who build slack into their budgets as a hedge against such cuts) and PERFORMANCE CONTINGENCY by inefficient managers (who have so much fat In simplest terms, this principle states that in their operations that there's plenty of room rewards should be based primarily on perfor- to cut). The real victims are those who run their mance rather than on other factors. Results from units in a highly effective manner. Similarly, numerous field studies and laboratory experi- poor performers usually can enroll in courses, ments suggest that, for people to be induced to attend seminars, and take vacations whenever do things they wouldn't do otherwise, a double- they want, whereas high performers are lucky digit increase above base—typically 12-15%—is to get an occasional day off when their work- required. However, in most corporations, barely loads permit. And, in your organization, who half this percentage of total compensation is is more likely to be offered financial incentives based upon performance. In the not-for-profit to retire early? Your t>est performer, or the per- sector the figure is usually even lower. son you're happy is leaving? As a quick test of the extent to which Principle 6: A long-deferred reward loses financial rewards are performance-contingent most of its power. in your organization, consider that compensation is determined primarily by three factors: What people do (clerk, manager, vice presi- TIMELINESS dent; assistant professor, full professor, dean), how long they've done it, and how well they've Making rewards contingent upon performance done it. Now imagine that some outsider is is unlikely to be effective unless the recipient allowed to ask two questions and must then receives them, or at least is informed that he will guess how much various employees are earn- receive them soon after the action being ing. Which of these three questions—What rewarded. If a rat in a cage pulls a lever, for job do they have? How long have they done example, and nine months later (on his anniver- it? How well have they done it?—is least use- sary date) a lump of sugar appears, no learning ful in predicting people's pay? In many, many occurs. In the same vein, employees who are organizations the answer would be "How required to wait a long time to be rewarded are well," which is inconsistent with the principle likely to conclude that they probably won't still of performance contingency. be there, or the boss won't be there, or the Distributing rewards without regard for money won't be there, or something bad will how well people have performed makes little happen in the meantime that will prevent the sense in general, and has a particularly nega- reward from being received. Even in cases tive impact on high performers. Rewards are where receipt of the reward is not in doubt, the among the most powerful tools an organiza- longer the interval between performance and tion has to thank high performers for past reward, the less likely it is that the recipient will efforts; noncontingent rewards don't do this. understand that the two are connected. Rewards can also play a major role In stimu- One primary cause of untimely rewards lating future performance; noncontingent is the existence of policies that delay dis- rewards don't do this either. bursements until an employee's anniversary 66 ORGANIZATIONAL DYNAMICS or some other arbitrary calendar date. pany tradition, endless appeals, and moun- Another common cause of delay is the exis- tains of paperwork usually deters anyone tence of so many sign-offs and one-over-one from attempting to do so. Therefore, raising reviews that by the time the reward is finally an employee's salary creates an annuity for approved, no one can remember what it's for. his or her organizational lifetime. Further- (By way of illustration, in the early days of more, since future increases are normally cal- GE's Work-Out program, a friendly rivalry culated as a percentage of salary, erroneously emerged among the consultants as to who increasing someone's pay will tend to become could find the longest trail of approvals geometrically more expensive over time. required before a reward could be distributed. That's why reversible compensation by what- I found six in one of the businesses I con- ever name—bonuses, incentive pay, compen- sulted to, but I lost the contest to someone sation at risk—is such an attractive alterna- who found nine. Not surprisingly, simplifying tive. Such rewards are consistent with the and rationalizing the approval trails became a principle of performance contingency and, being reversible, don't commit you to future priority Work-Out topic in GE.) payments unless high performance recurs. Perhaps in the days of tall hierarchies, slow Reversible compensation also can serve as a computers and large batch processing, it was kind of shock absorber, making it possible to cost-effective to require multiple sign-offs and to reduce payroll without taking out people. tie appraisal and reward cycles to predetermined dates, permitting data from many employees to Perhaps the biggest problem with reversible be processed at the same time. Given today's rewards is their tendency to become irreversible state of information technology, and increasin^y over time, by being perceived by recipients as in the future, it will be possible, and highly desir- entitlements. Numerous companies have had to able, to more closely connect orgaruzational scrap or rebuild their gainsharing, profit sharing, rewards with the behaviors being rewarded. or bonus plans because their payouts became so Principle 7: The best rewards are those expected that the "bonus" or "incentive" com- you can take back if necessary. ponent eventually became just another name for base pay. In one well publicized case, senior management decided to thank the workforce for an excellent year by giving every employee a REVERSIBILITY Christmas turkey. They did the same thing ihe One aspect of being human is that, whenever next year, but when the third year wasn't very you make a decision, there's a decent chance good they withheld the turkey, only to you've made a bad decision. Consequently, a encounter great outrage from employees who nice property of any decision is reversibility— complained that they were being denied their being able to undo an outcome you don't like or "traditional" Christmas turkey. In this case, it at least cut your losses and prevent its repetition. took only 24 months for a generous gift to be In general, reversible mistakes are not overly perceived as an entitlement! expensive; irreversible ones can be deadly. While some portion of this phenomenon In terms of organizational rewards, undo- may be attributable to human nature, organi- ing an undesired outcome means being able to zations sometimes bring this upon them- reclaim a reward that's already been given; selves, either by avoiding hard decisions and e.g., taking back a promotion or a company car. labeling nearly everyone a high performer or If this is impossible, the next best thing is to by allowing the non-bonus compensation reverse the decision to give the reward so that portion to erode to such an extent that only the same individual doesn't receive it again. by adding the bonus can the total package be Some rewards are virtually or literally said to be competitive. irreversible. For example, although policy Principle 8: Don't underestimate the manuals may contain procedures for recap- importance of non-financial rewards. turing base pay, the combined weight of com- Principle 8A: Stop using the term "reward 67 and recognition"; it implies that "rewards" of the same next week. refer to money, and "recognition" is all that You can, if you choose, make all your cute other stuff that organizations do. It is far employees (or at least, all your nonunion better to speak about financicil and nonfinan- employees) eligible for nontinancial rewards. cial rewards. You can also make these rewards visible if Depending on if and when you went to you like, and performance-contingent, and business school, you may recall being taught you needn't wait for high level sign-offs and that "intrinsic" rewards are more important anniversary dates, because nonfinancial than extrinsic ones: that money is merely a rewards don't derive from the budget or the "hygiene factor," not a motivator, and that boss, and are seldom mentioned in employ- what human beings truly crave is either "self ment contracts and collective bargaining actualization" or "job enrichment" but cer- agreements. Furthermore, in comparison tairJy not anything as crass as money. with our earlier discussion with respect to That isn't my message. To me the evi- increases in pay, if you inadvertently give dence is clear that money is, potentially, a someone more freedom or challenge than he wonderful reward. Nobody refuses it, can handle, you can take it back. Therefore, nobody returns it, and people who have more organizations can be bold and innovative in than they could ever use do dreadful things their use of nonmonetary rewards, because to get more. When financial rewards are dis- they don't have to live with their mistakes. tributed in ways consistent with the princi- Is all of this talk of nontinancial rewards ples we've been discussing, you purchase merely textbook stuff, or does it work in the motivation and energy to pursue organiza- real world? To answer this question, let me ask tional objectives; that's a good investment. you one. What do the following occupations The trouble with money, as noted have in common: soldiers and sailors; police- throughout this article, is that it is so often dis- men and tiremen; priests and ministers; pri- tributed in ways that violate most of the prin- mary school teachers; registered nurses; rehab ciples. When this occurs, you haven't pur- therapists; and volunteer workers who raise chased motivation, energy, or anything else money for charity? My response is: The finan- you can use. Spending money in this case is cial rewards for doing these jobs are not very not an investment, just a foolish expense. high, and the work is not particularly glam- Viewed in this context, the most attrac- orous. Yet the nontinancial rewards—chal- tive aspect of nonfinancial rewards is not that lenge, responsibility, interesting and meaning- they are self-actualizing or intrinsically ful work, etc.—tend to be high, and, not enriching but that their distribution tends to coinddentally, people in these occupations are be consistent with the principles of effective often highly committed and motivated. rewards. This makes them more powerful, Principle 9: Get peers, subordinates and and therefore of greater use to most organiza- customers involved in your reward and mea- tions, than financial rewards. surement systems To demonstrate this, let's take a fast Another vital aspect of successful reward inventory of some of the principles we've dis- systems pertains to who does the rewarding cussed, starting with availability. We noted (and the measuring). In a traditional bureau- earlier that financial rewards are necessarily cracy, this question is easily answered: If you limited, and sometimes are unavailable. On are my hierarchical superior, you do my the other hand, nonfinancial rewards are appraisal and recommend my rewards; if I never unavailable, because you can literally cre- outrank you, I appraise and reward you. In all ate your own supply. You can give recognition, organizations, however, opportunities or praise, or performance feedback to one abound for peers, subordinates, customers, individual, then give it to someone else. You and others to contribute to the reward and can give more freedom, challenge, or respon- measurement process. sibility to someone today, then give her more In one well-publidzed example involving 68 ORGANIZATIONAL DYNAMICS appraisal by peers, a division within Wells Fargo motion, or a trip to Hawaii while others did not. Corporation distributed Monopoly money to In theory, such pressure is desirable because it employees, telling them to "award" these funds catalyzes explanation and debate. In practice, to whichever fellow employee had been most particularly if your measurements are so unreli- helpful in enabling the employee making the able as to make decisions indefensible, you may award to achieve his or her objectives. The prefer to operate outside the glare of publicity. company then converted this make-believe Making rewards visible may also be unde- currency into real money. For another example sirable when the recipient wishes to avoid of peer-based rewards, you have to look no fur- being singled out for attention, for fear of ther than the last World Series or Super Bowl. incurring jealousy or disrupting workgroup While the total pool available to the winning harmony. In some cases, recipients may wish and losing teams is based on television revenue to appear to be out of favor with management. and gate receipts, the amount each player I once saw a division vice president, following receives is determined by his fellow teammates, a successful negotiation, attempt to hug a based on whatever objective and subjective union representative on the factory floor, only data they deem appropriate. Many other to have the beneficiary-victim angrily wriggle awards (e.g. Nobel Prizes, Academy Awards) free of the intended embrace. In this case, while a private expression of gratitude by the are also based on judgments by peers. company officer might have been welcome, Customers can also be heavily involved in public recognition most certainly was not. the reward and measurement process. Mar- riott hotels, for example, rely heavily on guest satisfaction surveys when making decisions about rewards, and Northwest Airlines has distributed cash-convertible certificates to its TIMELINESS most frequent flyers, inviting them to award I once saw a CEO give no more than a per- these certificates to deserving Northwest functory thank you after receiving a briefing employees. As another example, note that by a mid-level manager, but then telephone baseball's starting All-Star teams are selected her the next day to say "I really appreciated by the fans—which is not only an honor, has your input yesterday." In this instance, the financial consequences for many players due "theatrical pause" created by permitting time to incentive clauses in their contract. to elapse between the action and the recogni- Principle 10: All principles have excep- tion for that action undoubtedly enhanced its tions (except this one). value.

EXCEPTIONS TO THE PRINCIPLES: PERFORMANCE-CONTINGENCY VISIBILITY To reward their sales force, many firms offer At the risk of adding a note of confusion, I commissions in direct proportion to how much would like to note that the principles of effective product is sold. Such a practice is consistent rewards, like most other canons in life, are v^ith the principle of performance-contingency, sometimes worth violating. For example, we but it offers no incentive for high performers to argued that visibility adds to the power of provide assistance to low performers. To pro- rewards. This is always true, but it does not vide such an incentive, one large consumer therefore follow that making rewards more vis- products company dramatically changed the ible is always desirable. As previously noted, payout formula so that all sales people in the one key factor ought to be the quality of your same branch received the same commission, measurements. Publicizing the distribution of with the size of the pool dependent on sales rewards piUs pressure on an organization to say within that branch. The new system was per- why some people received a bonus, or a pro- formance-contingent at the branch level but

69 not from the standpoint of individual high per- ways that enable them to provide useful guide- formers This change goes against most of the lines in different countries and different cultures. principles pertaining to performance-contingency. The new system hurts the high performers, and is less effective at thanking them for past performance. However, it may prove to CONCLUSIONS be a superior way to invigorate the future Let me close with a few optimistic observa- because, for the first time, high performers have tions. First, I've argued that your organiza- an incentive to assist low performers. In gen- tion's reward practices are probably inconsis- eral, high performers have the most knowledge tent with many of the principles we've about how to sell, and also make the most cred- discussed, so your improvement opportuni- ible role models. If the change doesn't cause the ties are tremendous. Second, I can assure you high performers to leave or become alienated, that your competitors' practices are at least as the new system may prove to be superior. flawed as your own (since you obviously appreciate the importance of the topic or you wouldn't have read this far.) Therefore, upgrading your rewards can be a very effec- CULTURAL AND NATIONAL tive way to gain competitive advantage. DIFFERENCES Third, 20 years of studying reward sys- Where reward practices are concerned, it is tems has convinced me that there is virtually extremely important to be sensitive and pay no relationship between the power of attention to cultural and national differences. rewards and their cost. Throwing additional In some cultures, for example, ineligible classes resources at this problem is not the answer. are part of the fabric of society, and it is proba- The key is to modify your present practices so bly inevitable that reward practices will reflect that they become more consistent with the these societal distinctions. In other cultures, principles that have been discussed. performance-contingent rewards, at least at Fourth, I'll wager that not only do you the individual level, encounter philosophical know and agree with most of the principles opposition. A Japanese manager once told me, discussed, you're probably already doing after my lecture on performance-contingency, most of what we've been recommending — at that he was offended by my remarks: "You home! When, for example: shouldn't bribe your children to do their • You tell your kids that they can't play homework, you shouldn't bribe your wife to outside until their room is clean prepare dinner, and you shouldn't bribe your • You suggest to the other couple at the employees to work for the company." start of the meal In still other cultures, opposition to perfor- • that you split the check at the end mance-contingent rewards is founded less in • You agree to pay the gardener $25 to philosophy than in economic realities. In coun- do the yard, and another $20 after you inspect tries where marginal tax rates are very high, the yard employees are generally uninterested in finan- • You inform your highly competitive cial rewards, preferring leisure time, access to son, who is about to cut the cake, that his sister vacation villages, and any perks that don't will select the first piece you're putting into come with imputed income attached. In these practice many of the principles that have been countries the reward principle "availability" discussed in this article. Organizations are definitely refers to after-tax availability. larger, more heterogeneous, and infinitely more This does not mean that everything we know complex—but the principles are the same. about rewards becomes invalid in other setting. However, it does mean that, in the increasingly • To order reprints, call 800-644-2464 (ref. number global business environment of the 21^* Century, I 10502). For photocopy permission, see page 2. we must be willing to modify the principles in

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