There's no incentive in bonus

I've been blessed enough to see a big bonus and cursed enough to see the smallest.  The problem is, neither of them affected my motivation -- and not because I'm such a dedicated worker.

When I got a big bonus, I felt good of course.  The next day, the same problems confronted me, and I didn't work any less or more hard to solve them.  You can't make your brain pump out more than what it does, or come up with more innovative solutions suddenly.  The best I could have done was maybe type a little faster.

When I got a small (ahem, zero) bonus, I was very unhappy of course.  But a guy that I enjoyed working with expected me to deliver some code by the end of the week, and I spent the rest of the day dedicated to fulfilling my commitment.  That guy didn't affect my bonus one way or the other, so why should he suffer?  (Another demonstration that friends at work contribute significantly to your job enjoyment.)

The kicker is that my own productivity was one of the smallest factors.  Much bigger: profitability of the company, industry trends, macro-economic conditions.

In good years, a few people felt good, but most had mixed feelings.  After all, most people view themselves as above average, but most will receive an average bonus.

In bad years, everyone felt bad: people that had worked hard felt cheated, and those who didn't were upset just out of disappointment.

So, on net, bonus day as practiced on Wall Street is typically a mixed to negative experience.  It's supposed to reward and thereby encourage performance, but it's so weakly related to performance that it's more like a lottery.  This is the mechanism setting the culture at all these financial institutions that are too big to fail?

Proactive people care

"Proactive" is one of those over-used words that you come to hate, even at the same time feeling that it has a rightful spot in the language.  The 7 Habits of Highly Effective People provides a nice definition for "proactive", one that I felt captured what it should mean, elegantly and directly.  (For all I know, maybe the author coined the word himself.) 

In the world of things that you care about, you can only affect some percent of that.  Having a proactive mindset means working to expand your influence over as many areas of concern as possible.

A side aspect of this definition: if someone you work with isn't proactive enough, maybe they haven't figured out why they should care?  (And if that's something that concerns you, maybe you need to try to influence them.)

Long-term gains

After I work out / swim, I feel great.  Yet, before I work out, I have difficulty starting and think of dozens of reasons why I can't.  Why is that?

Sleeping feels great also.  So great that, like lots of people, it's not easy to drag myself out of bed in the morning.  Yet, at night, when I should go to bed, other things that I could or should do seem to proliferate, and I constantly go to bed late.  Why is that?

I believe the answer also explains why bonuses fail as an incentive practice.

All the satisfaction from the workout and the sleeping come at the end.  Meanwhile, there are other activities that offer more immediate rewards.  Sometimes, as in the case of working out, the activity itself requires exertion, and just sitting and doing nothing can feel more satisfying, in the very short run.

Frequently, the only thing that gets you to do the "right" thing is discipline.  Tricks can help, too, like telling yourself, "If you work out, you can have dessert."  But that's discipline in another form, because you can obviously do what you want.  Automatic withdrawals from your paycheck into your 401k is another form of discipline -- actually, another example of a very beneficial long-term goal that we wouldn't have a chance of fulfilling due to so many short-term alternatives, without the aid of another trick: "out of sight, out of mind".

Similarly, if you work hard over the course of the year, you increase your chance of getting a good bonus.

Of course, that assumes that you work in meritocratic organization, one which has strong capabilities in tracking productivity and achievement, and finely calibrating bonuses accordingly.  It further assumes that you can ignore the fact that the company's performance, which you have little effect on, overwhelmingly impacts your bonus more than any of your personal accomplishments.  If any of this was not true, then clearly the possibility of the bonus would have little part in your decision to do a good job.

But, even assuming all that, how likely is it that your decision in April to put in extra effort, give up your weekend, risk making a fool of yourself, and wear yourself out, will be affected at all by some additional dollars later that year?  It's a struggle just to stay focused on the positive incentive of a work out an hour from now!  The benefit of a full night's rest just a few hours away, all of which accrues to you, is too far off to affect your decisions now!

The bonus is classic example of a long-term gain.  I might further contend it does more damage than good, but at the very least, it clearly has no impact on productivity and personal incentives.

Talent is Overrated

Or so says Geoff Colvin.

If someone tells you, "I know the secret to super performance, and it's not talent," you know what the answer is, right? Hard work. Which is basically what this book says. He actually says it's 10 years of hard work to become an world-class performer.

He takes it a little further, explaining the necessity for "deliberate practice" as opposed to just regular practice. The difference is most obvious in activities with clear goals. It's free-throw shooting for hours instead of pick-up games. Repeatedly working through a knotty part of that concerto with deep concentration, not just breezing through easy pieces.

For software developers, I thought TDD would be a good analogy. TDD forces you to regularly think about testing your software, until you're writing good, modular software by second nature, and you can do it with increasingly complex applications.

To do effective "deliberate practice" in business professions, you often need a mentor -- someone who's better than you are -- to tell you, "This is one thing you should work on, and here's how you can do it." That focuses you on building the right skills.

He provided some good research about external and internal motivation. Basically, your intrinsic motivations will outweigh everything else. Managers have to figure out what that is for each person and how to arrange the work accordingly; motivation can't simply be bought.

Books like this can be useful as a reminder about how you want to spend your day, but since I had a good idea what he was going to say, I wouldn't normally have picked it up.

But, I saw some effusive praise on the back cover from people I admire: Daniel Pink, Herb Kelleher, a couple others. (Oh yeah, Donald Trump is there too.) Then I found out they're all cited in the book either as vanguards in the research he quotes, or as examples of outstanding performers --no wonder! In the end, the book is overrated.

Show me the... something else besides money

Do you think CEOs need the incentive of a big payout to do a good job? How about the tier of highest wager earners, which includes CEOs, who collectively took home 33% -- 1/3! -- of all wages in 2007? Do you think a big performance bonus helps them do better?

The evidence shows that people who do creative work actually perform worse when a financial incentive is dangled in front of them.

Dan Pink describes the economics in this short video. The short story is that financial rewards only work well under simple rules to achieve a clear goal. The reward narrows our focus.

Meanwhile, creativity requires a broad view. Bending the rules to uncertain ends. A narrow focus is a results killer.

Given that companies are constantly trying to lower costs, why wouldn't senior management of companies that give annual performance bonuses follow the evidence and get rid of them? Here's some possible reasons:

1. It's a setup that enables them to pay themselves generously.

1a. Particularly because it's so easy to game the results.

2. It forces workers to stay the entire year, until bonus season.

3. In theory, it allows cutting back bonuses if the company is not profitable. Given the bonus shenanigans during this financial meltdown, that's a hard argument to make.

4. It takes far more effort to create a company that motivates employees in other ways. Aka, management for dummies.

What does Dan recommend instead of financial rewards? Watch the video. (Via Bruce Eckel.)

Bailout bonus culture

The numbers in this study speak for themselves:

From 2006 through 2008, the top five executives at the 20 banks that have accepted the most federal bailout dollars since the meltdown averaged $32 million each in personal compensation.

That's each. And don't forget that includes a couple years where some CEO's paid themselves very little because, well, their companies were facing bankruptcy. Imagine the payday if they had actually done a good job!

Because large numbers can be difficult to grasp, the writers of the study provide some context:

One hundred average U.S. workers would have to labor over 1,000 years to make as much as these 100 executives made in three.

With that kind of example at the top, the result can only be car salesmen culture. Yes, some car salesmen take a long view and don't try to sell you something inappropriate, but they are clearly the exception. Nobody sends their grandmother by herself to negotiate a car purchase.

The bankers dress nicer and have larger vocabularies (some of my good friends are bankers!), but the result is the same. That doesn't make them evil, that just makes them people who behave according to the incentives provided by their companies.

How does your company compare?

If you work in a large company, you surely know how hard it can be to get rid of dead weight. You probably know some people who aren't contributing, yet manage to stay in their jobs for years.

Now imagine if

• everyone that worked in your company earned a job for life on their 3-year anniversary, unless fired for cause.
  
• workers whose jobs disappear, because the company got out of certain lines of business or closed departments, continued to get paid indefinitely while they waited for reassignment, even if they refused to take another job within the company.
• all cases for firing, including blatant cases such as being knocked out drunk on the job, required a special investigation and an arbitration hearing, which can take up to 2 and a half years to start, 40 days or more in active testimony, and another year before an actual ruling, during which time the worker continued to draw a full paycheck.
  
• over 2% of your workforce drew a paycheck and showed up everyday in order to do absolutely nothing, because they were waiting for arbitration or reassignment.

Do you think you'd have any incentive or motivation problems? How much dead weight would you expect, not even counting the 2% known non-workers? Imagine trying to get something done.

Sadly, this is a description of the New York City school system. Reading this full article presents an even bleaker picture than what I've summarized. The hundreds of millions of dollars all these non-working teachers and misaligned incentives cost annually is the least of the real cost.

There are a lot of messages and conclusions you could draw from this situation.

One thing that struck me is that many great teachers and principals still take the job, put their hearts into it, and do great work. They deserve an even bigger commendation, and probably more money, than I originally thought, and that's saying something.

And it speaks to the power of a shared vision. Despite being surrounded by wreckage (don't forget the poorly maintained schools and sometimes unsafe working conditions), a strong mission and sense of purpose can really help people who want to do good work stay focused.

If you have any leadership responsibilities in your company, surely the barriers to changing things and creating the better environment aren't as great as the ones facing the school system's superintendent. What's stopping you?

Misincentives

These aren't about software, but they speak to the difficulty of creating the right incentives, whether for a team of programmers or a team of doctors. Sometimes, even small incentives can backfire:

When day care centers fine parents who are late to pick up their kids, lateness increases. Why? Because the fine turns a moral obligation (come on time!) into a service for a fee (we'll take care of the kids if you pay us more!). Another example: When Swiss citizens were offered an incentive for agreeing to have a toxic waste dump in their community, their willingness to accept it fell by half. Why? The offer of an incentive induces them to ask What's in my interest? instead of What are my responsibilities as a citizen? And when people offer a stranger a token payment for help unloading a couch from a moving van, strangers are less likely to agree than if offered nothing. Why? Because the offer of money has turned the assistance from a favor into a job.

(Via Seth Roberts.)

And you'd think a program's success paves a road to its expansion. But the success of Medicare may actually create incentives against universal health care.

If I were a progressive I would be wondering right now whether Medicare was a tactical mistake. The passage of Medicare meant that most old people get government-provided health care coverage. Yet the way to get things done in this country, politically, is to get old people behind them. Further health care reform doesn't now seem to promise much to old people, except spending cuts on them.