7 ms·

Stop Paying Executives for Performance (2016)

73 points by mark_edward 10y ago

blazespin 10y ago
Doesn't this article contradict itself? On one hand, the article quotes some guy who says his work isn't influenced by bonuses and then just a few sentences later it says the danger of bonuses is that they influence risky behavior. Which is it?
- lsiebert 10y ago
  Cooking the books isn't working harder.
- Noseshine 10y ago
  So we have 1) "his work isn't influenced by bonuses" 2) "the danger of bonuses is that they influence risky behavior" I see two statements - but I don't see a contradiction. Which is it? They are independent of one another?
  - ffggvv 10y ago
    Exactly. They influence but not in a good way.
    - Noseshine 10y ago
      Now that is a contradiction: You say "exactly" to then claim the exact opposite? How do they interact? I said - and still say - those are completely independent statements. How does 1) have any influence on 2)? If that individuals work is or isn't influenced by bonuses the general statement 2) changes somehow? Magically? Or vide versa, the same. No connection. No matter what you think of 2), the personal statement 1) is right or wrong independent of 2).
  - ikeyany 10y ago
    I think there is an implied "tend to" before "influence".
- lhopki01 10y ago
  One is a statement by an individual - an anecdote the other is what data from studies have shown us. Which do you think it is?
- cirnine 10y ago
  The last paragraph of the article answers your question: "We only half agree: Abundant evidence shows that people – including top managers – will in fact start to behave differently if you make a large proportion of their remuneration dependent on some measure of performance. But it will not be in a way you want them to behave."
deleted 10y ago
[deleted]
edblarney 10y ago
Maybe a much longer window in the equity would be a better idea. Instead of vest over 4 years - vest over 10 years, with the bulk of them later. This way they know they have to create long term value.
- Noseshine 10y ago
  No, that would not work any better. Who is going to be that god-like genius to disentangle cause and effect of an individual person's actions anyway, and now even in the long run? In an environment where no experiments or tests are possible, because the chosen path is the only path we will ever know.
  - sokoloff 10y ago
    For an executive, I don't care tracking cause and effect of their individual actions. I care about the aggregate outcome for stakeholders (shareholders, customers, and employees). Whether 13 weeks of paid parental leave or this healthcare plan vs that one or this change to the telecommuting rules that they advocated for is irrelevant. Did the company succeed and thrive and serve its stakeholders? One measure that I've seen recently (and like) is "compounded growth rate, over 6-10 years, of the 3 year moving average of stock price" from grant to payout date, subject to minimum thresholds [so you're not just paying for ordinary market growth]. That measure is also imperfect, but it seems less imperfect than others. (Disclosure: the company I work for adopted such a plan last year, so we won't know how it really plays out for at least 5.5 more years. Edit: program summary here: http://ir.cimpress.com/mobile.view?c=188894&v=202&d=3&id=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTEwOTIzNDE5JkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3 http://ir.cimpress.com/mobile.view?c=188894&v=202&d=3&id=aHR... )
    - Noseshine 10y ago
      For an executive, I don't care tracking cause and effect of their individual actions. So you want to pay executives but not based on how THEY actually did as individuals, but on a group basis? That is a truly innovative bonus system. Excuse the sarcasm, you invited it. In case you meant something else than me, you replied to my comment that was a reply to one very specific comment, and I obviously assume we are still on that topic. In that context your reply "I don't care how the individual does" is strange at the very least. EDIT: Ah I get it, but it does not make any more sense because if you assumed I meant the actions of the executive on a Tuesday at 2 pm in September instead of his whole reign than I don't understand how one can come up with such an interpretation. Reminds me of the topic submitted one or two days ago of that investor person who didn't want to say anything in public any more to not have to have exactly these kinds of ridiculous misinterpretations to deal with. You cannot say if it was that specific individuals actions specifically that caused success! Not even if the executive is CEO for 30 years. It has been shown again and again that such successful executives, when placed into a different environment suddenly fail. Because it isn't just them, it is the whole environment that caused their success.
pella 10y ago
by Nassim Taleb "4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards. " from: "Ten principles for a Black Swan-proof world (2009)" https://www.ft.com/content/5d5aa24e-23a4-11de-996a-00144feabdc0 https://www.ft.com/content/5d5aa24e-23a4-11de-996a-00144feab...
- smcl 10y ago
  I agree with the first part of that quote, but when it says "No incentives without disincentives" that's where the bankers would argue that there are disincentives, like the "performance culture" (firing the bottom performing 10% etc). I would disagree with them (the bottom 10% may just be more aligned with reality, or considering the long term for example) but these guys are slippery and will find any means necessary to justify this behaviour.
- aaronchall 10y ago
  The balanced scorecard provides a way to manage non-financial measures of performance, and incentivize long-run measures. https://en.wikipedia.org/wiki/Balanced_scorecard https://en.wikipedia.org/wiki/Balanced_scorecard If you measure the result of independent inspections and auditors on the executives' scorecard, don't be surprised if you get a financially healthier long run management of the firm. I think at some point Taleb was learning the math and theory behind statistics, and then decided it was time to stop learning.
  - badsock 10y ago
    That seems better than judging performance based on a single metric, but still wide open to gaming. In my experience, it's better to use your full range of objective and subjective facilities to select a good manager, and then trusting them until it's time to re-evaluate (using the same means but now with more evidence of their performance). An organization that runs on extrinsic motivations can only ever be mediocre at best (and often worse), and there's very little that kills intrinsic motivation more than putting people into systems designed reduce a human's potential to a number (or several numbers in the case of your balanced scorecard).
coldcode 10y ago
I got my first job because the director of the IT organization had some incentive to show lowered expenses so he routinely laid people off near the end of the year and then desperately hired new ones at the start of the next. Somehow the math worked out for him. This was a long time ago though.
- Spooky23 10y ago
  I know a guy who collects people as layoff fodder at a bank. He finds a group that is tenuously related to what he does, uses bureaucrat-kungfu to take them on, then uses them when the next 10% layoff comes. So he protects his core team that generates his bonus, and gets the extra bonus for firing people.
known 10y ago
There is no intrinsic motivation. http://researchnews.osu.edu/archive/inmotiv.htm http://researchnews.osu.edu/archive/inmotiv.htm
- tyleraland 10y ago
  Thanks for the link. This theory seems relevant to my own work and motivation. > A child playing baseball may be satisfying his need for physical exercise, while the professional player is satisfying his parental instinct by providing a good income for his family. > For children and professionals, baseball is a means to two different ends. When other people start setting goals for me (and I buy into them), I'm apt to lose motivation, even if the nature of my work remains unchanged. Perspective can be a very powerful tool. I appreciate the nuance provided by this "16 basic desires" theory. https://explorable.com/16-basic-desires-theory https://explorable.com/16-basic-desires-theory
- mdorazio 10y ago
  You're making a rather sweeping statement based on the opinion of a single professor. A quick Google Scholar search will show you that the vast majority of research on motivation still shows that intrinsic motivation very much exists. It's just our definitions of extrinsic vs. intrinsic and the recognition of how the two interact that are changing slightly. See, for example, [1][2][3]. [1] http://www.sciencedirect.com/science/article/pii/S0361476X99910202 http://www.sciencedirect.com/science/article/pii/S0361476X99... [2] http://psycnet.apa.org/journals/amp/55/1/68/ http://psycnet.apa.org/journals/amp/55/1/68/ [3] http://psycnet.apa.org/journals/bul/125/6/627/ http://psycnet.apa.org/journals/bul/125/6/627/
pluma 10y ago
It's not paying people for performance that's the problem, it's paying them based on metrics. When you incentivise people to optimize metrics, they will optimise the metrics. But the metrics are probably only intended as a stand-in for something that's harder or even impossible to quantify. This applies to every profession. If you pay programmers based on the lines of code they write, programmers will write more lines of code. But what you were probably trying to pay them for was productivity -- instead you may have ended up paying them for verbosity. This is basically the Cobra Effect: https://en.wikipedia.org/wiki/Cobra_effect https://en.wikipedia.org/wiki/Cobra_effect
- JamesBarney 10y ago
  How do you contractually pay someone for performance without relying on metrics?
  - aswanson 10y ago
    Use longer term metrics (grin), which means relying on multi-year performance rather than quarterly.
  - sokoloff 10y ago
    Find a metric that is hard to game and aggregates the results you're interested in driving over a relevant period of time. "Widgets that sold and had no returns logged" is better than "Widgets that passed QC" is better than "Widgets completed" is better than "Widgets started" for a widget assembly line worker. Perhaps even better is "long-term profit and sustainability of Widgets, Inc" but that is harder to tie back to the individual widget maker. (A possible metric for the last is "arithmetic average of the share price of Widgets, Inc measured between 9 and 15 years from now", but that's hard to use to motivate someone to make more/better widgets this week.)
  - fian 10y ago
    Don't tie bonuses to individual contributions. Individuals will work to meet their individual KPIs/metrics often to the detriment of the organisation. If every employee gets a bonus based on the organisational performance then there is a greater incentive for team work and cooperation within the organisation. I previously worked in a company with this policy. It meant the receptionist got the same bonus as the Principal Engineers. That policy might make some people unhappy if they think they deserve more compensation because they are more educated / smarter / experienced in a specialty. The thing is, the admin ans support staff worked hard to make the place run smoothly. The engineers were almost completely unburdened with flight, accommodation or training bookings. IT equipment was procured and commissioned in days, not weeks/months. If someone was roadblocked, the organisation worked to remove the roadblock. It was the best company I have ever worked for. Sadly, the company was acquired and the cooperative culture died after a few years. Other places I have worked are in contrast much more mercenary. Individual performance is measured and used to determine compensation and promotion. Individuals and internal teams actively compete with each other resulting in significant inefficiency. Internal politics dominate business making decisions. You can still measure performance against KPIs but not tie it to individual compensation. Instead use the metrics to analyse where there might be opportunities for improving efficiency through restructuring / training.

73 points by mark_edward 10y ago

Doesn't this article contradict itself? On one hand, the article quotes some guy who says his work isn't influenced by bonuses and then just a few sentences later it says the danger of bonuses is that they influence risky behavior. Which is it?

lsiebert 10y ago
Cooking the books isn't working harder.
Noseshine 10y ago
So we have 1) "his work isn't influenced by bonuses" 2) "the danger of bonuses is that they influence risky behavior" I see two statements - but I don't see a contradiction. Which is it? They are independent of one another?
- ffggvv 10y ago
  Exactly. They influence but not in a good way.
  - Noseshine 10y ago
    Now that is a contradiction: You say "exactly" to then claim the exact opposite? How do they interact? I said - and still say - those are completely independent statements. How does 1) have any influence on 2)? If that individuals work is or isn't influenced by bonuses the general statement 2) changes somehow? Magically? Or vide versa, the same. No connection. No matter what you think of 2), the personal statement 1) is right or wrong independent of 2).
- ikeyany 10y ago
  I think there is an implied "tend to" before "influence".
lhopki01 10y ago
One is a statement by an individual - an anecdote the other is what data from studies have shown us. Which do you think it is?
cirnine 10y ago
The last paragraph of the article answers your question: "We only half agree: Abundant evidence shows that people – including top managers – will in fact start to behave differently if you make a large proportion of their remuneration dependent on some measure of performance. But it will not be in a way you want them to behave."

deleted 10y ago

[deleted]

edblarney 10y ago

Maybe a much longer window in the equity would be a better idea. Instead of vest over 4 years - vest over 10 years, with the bulk of them later. This way they know they have to create long term value.

Noseshine 10y ago
No, that would not work any better. Who is going to be that god-like genius to disentangle cause and effect of an individual person's actions anyway, and now even in the long run? In an environment where no experiments or tests are possible, because the chosen path is the only path we will ever know.
- sokoloff 10y ago
  For an executive, I don't care tracking cause and effect of their individual actions. I care about the aggregate outcome for stakeholders (shareholders, customers, and employees). Whether 13 weeks of paid parental leave or this healthcare plan vs that one or this change to the telecommuting rules that they advocated for is irrelevant. Did the company succeed and thrive and serve its stakeholders? One measure that I've seen recently (and like) is "compounded growth rate, over 6-10 years, of the 3 year moving average of stock price" from grant to payout date, subject to minimum thresholds [so you're not just paying for ordinary market growth]. That measure is also imperfect, but it seems less imperfect than others. (Disclosure: the company I work for adopted such a plan last year, so we won't know how it really plays out for at least 5.5 more years. Edit: program summary here: http://ir.cimpress.com/mobile.view?c=188894&v=202&d=3&id=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTEwOTIzNDE5JkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3 http://ir.cimpress.com/mobile.view?c=188894&v=202&d=3&id=aHR... )
  - Noseshine 10y ago
    For an executive, I don't care tracking cause and effect of their individual actions. So you want to pay executives but not based on how THEY actually did as individuals, but on a group basis? That is a truly innovative bonus system. Excuse the sarcasm, you invited it. In case you meant something else than me, you replied to my comment that was a reply to one very specific comment, and I obviously assume we are still on that topic. In that context your reply "I don't care how the individual does" is strange at the very least. EDIT: Ah I get it, but it does not make any more sense because if you assumed I meant the actions of the executive on a Tuesday at 2 pm in September instead of his whole reign than I don't understand how one can come up with such an interpretation. Reminds me of the topic submitted one or two days ago of that investor person who didn't want to say anything in public any more to not have to have exactly these kinds of ridiculous misinterpretations to deal with. You cannot say if it was that specific individuals actions specifically that caused success! Not even if the executive is CEO for 30 years. It has been shown again and again that such successful executives, when placed into a different environment suddenly fail. Because it isn't just them, it is the whole environment that caused their success.

pella 10y ago

by Nassim Taleb "4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards. " from: "Ten principles for a Black Swan-proof world (2009)" https://www.ft.com/content/5d5aa24e-23a4-11de-996a-00144feabdc0 https://www.ft.com/content/5d5aa24e-23a4-11de-996a-00144feab...

smcl 10y ago
I agree with the first part of that quote, but when it says "No incentives without disincentives" that's where the bankers would argue that there are disincentives, like the "performance culture" (firing the bottom performing 10% etc). I would disagree with them (the bottom 10% may just be more aligned with reality, or considering the long term for example) but these guys are slippery and will find any means necessary to justify this behaviour.
aaronchall 10y ago
The balanced scorecard provides a way to manage non-financial measures of performance, and incentivize long-run measures. https://en.wikipedia.org/wiki/Balanced_scorecard https://en.wikipedia.org/wiki/Balanced_scorecard If you measure the result of independent inspections and auditors on the executives' scorecard, don't be surprised if you get a financially healthier long run management of the firm. I think at some point Taleb was learning the math and theory behind statistics, and then decided it was time to stop learning.
- badsock 10y ago
  That seems better than judging performance based on a single metric, but still wide open to gaming. In my experience, it's better to use your full range of objective and subjective facilities to select a good manager, and then trusting them until it's time to re-evaluate (using the same means but now with more evidence of their performance). An organization that runs on extrinsic motivations can only ever be mediocre at best (and often worse), and there's very little that kills intrinsic motivation more than putting people into systems designed reduce a human's potential to a number (or several numbers in the case of your balanced scorecard).

coldcode 10y ago

I got my first job because the director of the IT organization had some incentive to show lowered expenses so he routinely laid people off near the end of the year and then desperately hired new ones at the start of the next. Somehow the math worked out for him. This was a long time ago though.

Spooky23 10y ago
I know a guy who collects people as layoff fodder at a bank. He finds a group that is tenuously related to what he does, uses bureaucrat-kungfu to take them on, then uses them when the next 10% layoff comes. So he protects his core team that generates his bonus, and gets the extra bonus for firing people.

known 10y ago

There is no intrinsic motivation. http://researchnews.osu.edu/archive/inmotiv.htm http://researchnews.osu.edu/archive/inmotiv.htm

tyleraland 10y ago
Thanks for the link. This theory seems relevant to my own work and motivation. > A child playing baseball may be satisfying his need for physical exercise, while the professional player is satisfying his parental instinct by providing a good income for his family. > For children and professionals, baseball is a means to two different ends. When other people start setting goals for me (and I buy into them), I'm apt to lose motivation, even if the nature of my work remains unchanged. Perspective can be a very powerful tool. I appreciate the nuance provided by this "16 basic desires" theory. https://explorable.com/16-basic-desires-theory https://explorable.com/16-basic-desires-theory
mdorazio 10y ago
You're making a rather sweeping statement based on the opinion of a single professor. A quick Google Scholar search will show you that the vast majority of research on motivation still shows that intrinsic motivation very much exists. It's just our definitions of extrinsic vs. intrinsic and the recognition of how the two interact that are changing slightly. See, for example, [1][2][3]. [1] http://www.sciencedirect.com/science/article/pii/S0361476X99910202 http://www.sciencedirect.com/science/article/pii/S0361476X99... [2] http://psycnet.apa.org/journals/amp/55/1/68/ http://psycnet.apa.org/journals/amp/55/1/68/ [3] http://psycnet.apa.org/journals/bul/125/6/627/ http://psycnet.apa.org/journals/bul/125/6/627/

pluma 10y ago

It's not paying people for performance that's the problem, it's paying them based on metrics. When you incentivise people to optimize metrics, they will optimise the metrics. But the metrics are probably only intended as a stand-in for something that's harder or even impossible to quantify. This applies to every profession. If you pay programmers based on the lines of code they write, programmers will write more lines of code. But what you were probably trying to pay them for was productivity -- instead you may have ended up paying them for verbosity. This is basically the Cobra Effect: https://en.wikipedia.org/wiki/Cobra_effect https://en.wikipedia.org/wiki/Cobra_effect

JamesBarney 10y ago
How do you contractually pay someone for performance without relying on metrics?
- aswanson 10y ago
  Use longer term metrics (grin), which means relying on multi-year performance rather than quarterly.
- sokoloff 10y ago
  Find a metric that is hard to game and aggregates the results you're interested in driving over a relevant period of time. "Widgets that sold and had no returns logged" is better than "Widgets that passed QC" is better than "Widgets completed" is better than "Widgets started" for a widget assembly line worker. Perhaps even better is "long-term profit and sustainability of Widgets, Inc" but that is harder to tie back to the individual widget maker. (A possible metric for the last is "arithmetic average of the share price of Widgets, Inc measured between 9 and 15 years from now", but that's hard to use to motivate someone to make more/better widgets this week.)
- fian 10y ago
  Don't tie bonuses to individual contributions. Individuals will work to meet their individual KPIs/metrics often to the detriment of the organisation. If every employee gets a bonus based on the organisational performance then there is a greater incentive for team work and cooperation within the organisation. I previously worked in a company with this policy. It meant the receptionist got the same bonus as the Principal Engineers. That policy might make some people unhappy if they think they deserve more compensation because they are more educated / smarter / experienced in a specialty. The thing is, the admin ans support staff worked hard to make the place run smoothly. The engineers were almost completely unburdened with flight, accommodation or training bookings. IT equipment was procured and commissioned in days, not weeks/months. If someone was roadblocked, the organisation worked to remove the roadblock. It was the best company I have ever worked for. Sadly, the company was acquired and the cooperative culture died after a few years. Other places I have worked are in contrast much more mercenary. Individual performance is measured and used to determine compensation and promotion. Individuals and internal teams actively compete with each other resulting in significant inefficiency. Internal politics dominate business making decisions. You can still measure performance against KPIs but not tie it to individual compensation. Instead use the metrics to analyse where there might be opportunities for improving efficiency through restructuring / training.