It was 1967, and it was my first job in engineering for what was, at that time, one of the top companies in the machine tool industry. This manufacturing company was a young engineer’s dream and as an entry-level engineer, my initial assignments had me directly involved with the workers in the factory. It was there that, in addition to having my first real taste of manufacturing, I had my first real lessons in employee incentives and behavior.

The company was very proud of its factory incentive system. Production employees, in addition to their base wage, received a piecework incentive. Standard times for the manufacturing operations required to make every part were established before it went into full production. The incentive system then paid off if the employee beat the standard time to complete the operation. For example, if a machine operator making a part with a 10-per-hour standard made 12 parts that hour, they would receive 120% of their base hourly rate for that hour.

This seemed like win-win. The company got improved production rates and the workers had an opportunity to make more money. However, I learned productivity was not very good, parts were still late, quality issues were abundant, and costs were high. The system was not achieving what it was intended to achieve. Its intentions were good but its design was flawed. It was, in many situations, actually incenting the wrong behavior. One of the more obvious flaws was that operators got paid their incentive based solely on the quantity of parts produced. There wasn’t a good system in place to ensure the quality of the parts. This often resulted in operators being paid incentives for producing bad parts. And it doesn’t end there. Once the bad parts were discovered, they were often sent back to the same machinist who could earn incentive pay to fix his own mistake.

Its all in the design

The key to a successful system is therefore in the design. It must ensure that, unlike the piecework system described here, it doesn’t inadvertently incent the wrong behavior. This is important in large-scale plans or simple performance rewards.

It’s actually very easy to implement a destructive rather than a constructive incentive program. You have a problem and an incentive program seems like a good way to solve it. You want a quick fix so you don’t spend the time you should to really think out the ramifications and the possible behaviors that could be incented by the plan. Following some simple guidelines can help ensure your design creates the results you intended.

Rules of thumb

1. In designing a plan, don’t focus on only one aspect of the process. It will likely create unwanted behavior in another part of the process. An incentive plan rewarding speed of manufacturing or delivery may also create quality issues.

2. Don’t design the plan to be too general. If it doesn’t identify specific objectives, it enables interpretation that could hurt rather than help the company. A plan designed to reward sales increases without specifically stating target products or price points may result in increased sales of lower-margin, less-profitable products, and a reduction rather than an improvement in company performance.

3. Play the devil’s advocate throughout the design process. Involve your managers and the employees involved to gain insight into their reaction and interpretation. You need to feel comfortable the plan will incent the behavior you intend before you implement it.

Incentives do work

I have heard (and I tend to agree with) the argument: “Why do I need to incent them to do a good job? That’s what I pay them for.” But, designed and used properly, incentives can be a powerful management tool. They can help us solve short-term problems, mold behavior, and develop the company culture. That’s both the good news and the bad. They work so well that, unless designed properly, they could incent unintended and potentially destructive behavior.