Friday, January 22, 2010

Rewards lead to results

Have you ever wondered why so many companies are so focused on this month's or quarter's sales, while others have better long-term performance and are successful year after year? Why do some companies put so much effort into writing long-term plans that no one reads? The answer is employees do what they're rewarded for and avoid things that will lead to punishment. It sounds Pavlovian, but it explains a lot of behavior that otherwise doesn't make a lot of sense.

Salespeople are usually rewarded based on meeting quarterly and annual quotas. If they miss their quotas, their income will be lower than expected, they won't earn bonuses and they might get fired. Therefore, missing their quotas is to be avoided. On the other hand, they don't want to exceed their quotas by too much, because if they do, their quotas will be increased in the next period and they might have trouble achieving them. Also, if they know that they're going to exceed their quotas and they can have their customers defer purchases to the next quarter, it'll make next quarter's numbers much easier to make. So, even though they might be able to sell more in the current quarter, they don't.

Executives in public companies know that their stock value is based largely on sales, earnings  and profitability growth. It's easier and faster to increase profits by cutting costs than by increasing sales; that's why companies freeze hiring, delay capital expenses and lay off workers at the first sign of a sales downturn. These actions protect earnings and help to maintain stock prices, which means that the executives can preserve their bonuses. Obviously, many cost cuts are necessary and appropriate, but companies often overdo it, making themselves uncompetitive and crippling their ability to respond when the economy recovers. Short-term pain avoidance almost always trumps long-term thinking.

Rewards don't necessarily have to be economic; they can be emotional as well. Many studies show that giving people personal recognition for doing a good job can be even more effective in eliciting a desired behavior than bonuses, especially if the positive recognition is given often and sincerely.

Companies often reward employees for doing the wrong things. For example, some companies reward employees for writing long, detailed plans that are then put on a bookshelf and ignored. The details of the financial forecasts, the number of pages and the length of the accompanying executive presentations are the measurements for whether the plan is good or not, rather than the fact that events may make the plan irrelevant in a few months. Employees get the message that quantity is more highly valued than quality, and that the plan is more important than actual performance.

In short, people do what they're rewarded for. If you're not getting the results you want, first figure out what behavior you're rewarding.
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