Incentives make society go 'round. Then why are so many employee incentivization schemes so dumb?
At the beginning and end of any economy is people. People put in labor either directly or indirectly to help produce goods and services for people. So people should be at the core and the pinnacle of every business plan. The now-famous stories of Netflix's HR policy and Amazon's customer obsession are telling of how the right focus on people can reward businesses.
It may be obvious, but people are motivated by incentives. Whether it be monetary, emotional or instinctual, incentives are humanity's best explanation of why people do what they do. Humans at the core are selfish, after all.
Logically, then, from a business management perspective, setting the correct incentives package should lure the perfect workforce for maximum productivity. Simple, huh?
That's why it's all the more incredible how so many businesses fail miserably in aligning their business objectives with appropriate employee incentives. And by incentives I don't mean simple monetary compensation for work rendered. An incentive is everything positive that comes out of a particular engagement. In this age where human dignity is becoming as important as minimum wage, simply throwing a paycheck at employees no longer cuts it. Empathy is the new black in business management theory nowadays, and that means incentivization schemes need to encompass more than flawless execution of salary direct deposits and hanging a suggestions box next to the coffee maker. Long-term survival and prosperity of a modern-day business requires much more diligence from management than simply dumping all responsibility to HR, decreeing a salary cap and turning a blind eye.
I want to take you back to when I started thinking about this topic. A few years ago, an article from Harvard Business Review (HBR) illustrated a patently stupid but surprisingly common bonus incentive scheme for bus drivers: to be on-time at their final destination. Not surprisingly, the bus drivers ignored designated stops along the way. I've personally experienced this many times in the past in South Korea where getting to the bus garage on time was more important to drivers' job security than actually shuttling people safely to their destinations. (1) Classic misalignment of objectives.
To refine our previous statement, the key to business success is to perfectly align employee incentives to business objectives. Again. Simple enough, right?
Let's examine the most fundamental intra-business transaction: Labor for compensation.
Look, I get it. Back in the early days of the Industrial Revolution, hours input directly correlated to measurable output since manual labor-based manufacturing was pretty much all there was in terms of industry. Labor was quite the variable cost.
Probably the remnant of this mentality along with a lingering 18th-century slave-owning mindset of "employees-are-property", many work cultures have traditionally navigated the following centuries and still are (surprisingly) promoting dangerous workaholism. Many of you have probably heard about the "996" expectations in China's tech sector. Years before that, it was the morbid phenomenon of Karoshi in Japan. Game developers in the West (and East) are just now being forced to recon with the awful consequences of toxic "crunch culture".
At this day in age, what is the actual productivity gain of keeping your employees in an office chair from 9-to-9, or attempting to monitor people working from home to stick to a 9-to-5 schedule? Research has been clear for years that overwork is actually detrimental to productivity. The only incentive I can see for employees to stick to this kind of stupid work arrangement is to satisfy the megalomania of a boss who clearly does not have the company's best interests in mind. Although, I guess that can also be a perverse incentive in it's own way.
I do recognize that customer-facing roles such as floor staff of brick-and-mortar retail are still linked to hours input since their very availability to customers is the job that needs to be performed. And there are other high-skilled jobs that require prescribed work hours as well, e.g. medical doctors and nurses. But in the age of proliferating automated kiosks and rapid shift to e-commerce (for the former) and massive gains in telehealth implementation (no) thanks to COVID-19 (for the latter), who knows how these jobs will adapt to a changing future?
In today's technologically advancing world, productivity does not necessarily directly scale with human labor input, since robotics and automation have revolutionized so much of manufacturing and will continue to further evolve with the implementation of artificial intelligence. (2) The primary bottlenecks of production capacity today are more of demand, supply chain constraints and equipment throughput. Who doesn't operate on just-in-time manufacturing principles these days? Enabled by technology, advanced economies are moving more and more towards a different calculus of input versus output.
Having established the fact that there is a continuously weakening link between hours of labor input versus productivity output, it is a logical conclusion that strict adherence to the "normal" office workday/workweek schedule is becoming more and more an archaic and backwards ritual. Yet, countless businesses (that really shouldn't) are still sticking to this old model either due to ignorance, denial or laziness. Most likely some combination of the three. "It's the way we've always done it," they say. They used to ride horseback for transportation too, you know.
Here's a reality check: The world is praising, enabling and encouraging a growing "gig" or "side income" economy (i.e. Uber drivers, YouTubers, Instagram influencers, Shopify-based drop shipping, Etsy-based businesses etc.) while traditional notions of "loyalty" to one's company are ageing away with the generation that once enshrined this doctrine. Employers are increasingly having to compete with these myriad alternative income opportunities while also fending off the desire for star employees to start their own companies - the latter of which is not only in vogue but also becoming easier and easier to do.
This is all the while a continuously decreasing working population in many developed economies will intensify competition for a shrinking pool of talent. Adding insult to injury, the increasing global political momentum towards universal basic income schemes, "robot tax" and the like may also eventually bring about a fundamental shift in how work is perceived, with one possible outcome being an incarnation of the Nordic economic model that (indirectly) encourages entrepreneurship risk-taking afforded by a robust social safety net.
Yeah. Tough times ahead. Like every time. What is a responsible manager to do?
One thing that needs to be drilled in is the fact that human beings are crafty creatures that will take any and all opportunities to exploit an existing system to eke out convenience. This HBR article said it best: "...people perform to the measure, not to the objective." And perform they can.
This feature of human nature presents management with a perpetual cat-and-mouse game where there a constant cycle of incentivization schemes (the carrot) and company policies (the stick) being understood and exploited by employees as time goes on, forcing the company to impose stricter measures. Aside from legal restrictions, the only factor stopping companies from imposing draconian policies in the end is the cost-effectiveness of surveilling and enforcing such measures. Such vicious cycle!
(Doge meme generated through Imgflip.com)
But it doesn't have to be. I diagnose the fundamental reason for this downward spiral to be rooted in simple lack of empathy disguised as low prioritization. Simply going through the motions and setting up a HR department and corralling all people-related affairs to a perpetually under-delegated, also mis-incentivized (how do you even evaluate an outstanding HR performer?) group of also-employees will become more irresponsible as society charges deeper into the 21st century.
Societal changes and technological advances constantly change the circumstances of business, along with the incentives that make employees tick. And this change never ceases. We are now living in a strange new world where record low unemployment is somehow fueling an expanding wealth gap, economies are growing but wages have been stagnating for years, billions and trillions of cash injection in the name of economic stimulus isn't causing much (if any) inflation, and stock indexes are soaring seemingly oblivious to the massive hurt felt by the real economy. None of this is is explained in any textbook. Not so smart, are we?
We need to realize that times have changed and that the traditional notion of employee incentive schemes strictly focused on financial compensation in return for clocking in day-in and day-out to simply meet annual KPI metrics don't cut it anymore. It's like trying to cram everybody into the same square hole. Seriously, for all the insane (and I mean it) and endless amount of effort and investment that goes into making business processes more "efficient", how come the treatment of the most fundamental component of any company - employees - seldom get a second thought? How does any management keep a straight face discussing business efficiency improvements without a passing thought on implementation of individual employee-tailored work/incentive schemes to extract maximum efficiency (and cost-benefit) for the long term? Heck, I bet you that employees motivated by their respective bespoke work/incentive schemes will come up with all those "business efficiency improvement" solutions by themselves because they're incentivized. Make the objective become the measure!
Managements have to realize that this part of running the business - employees - is and will increasingly demand more attention. Running a business was and is always a grind, but now a significant portion of that effort must be channeled into designing, maintaining and constantly refining employee incentive schemes. Due to all the developments in technology, the impact of a single employee is far greater now than it has ever been in history and will only continue to increase. Shunning this responsibility and hoping the HR department makes the problem go away is irresponsible and lazy, now more than ever. Escaping from the archaic mindset of "compensation package = incentivization" and designing a multi-faceted, tailorable incentivization scheme, constantly evaluating the effectiveness of those implementations and re-aligning incentives with business objectives as frequently as necessary should become as common, routine and just as important as reviewing quarterly financials.
Besides, treating employee incentivization as a core management tenet can not only help with improved business performance and outcomes but can also make an effective barrier against costly duds from being hired in the first place since cultural fit and alignment with business objectives will be a consideration from the very beginning stages of hiring. Additional benefits include higher engagement, lower resentment, and most importantly, loyalty - although not necessarily to the company, but to fellow employees. (3)
Like it or not, people are and always will be at the core of any human endeavor, especially one that requires such a cohesive, collective effort as enterprise. I think it's time we started to manage our businesses like we know that.
Footnotes:
1. I suspect that these stupid schemes were enabled in part by the fact that many public transit facilities are at least partly subsidized by municipal governments which affords company management the luxury of decoupling from market feedback - another example of wrong incentivization in a different scope I'll explore in a future article. (Back to article)
2. This may be one of the key reasons why it is so hard to escape the "middle income trap" since relatively quick low skilled labor-fueled economic growth hits a wall when wages increase to uncompetitive levels while it takes decades of effort to retool the industrial structure and re-educate a population for the high-skilled, knowledge-based work economy of developed nations. But I digress. (Back to article)
3. In this age of social media, it is interesting to observe how some companies (or often, key management figures) become targets of former employee criticism once a brave individual breaks the ice and exposes wrongdoing. Those companies end up paying a hefty price by way of boycotting and distancing by corporate collaborators. A singled out individual can lose their jobs in a matter of days. But in some cases former (and current) employees actually defend a great workplace/colleague in the face of unfound criticism by an outlier disgruntled former employee, which, in the end, winds up boosting corporate image. Proliferation of online interaction and e-commerce has enabled lighting-fast reactions that can deal a potentially fatal blow to any company. Again, how times have changed. (Back to article)
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