Individual incentives at odds with organizational incentives
“Eliminate numerical quotas for the workforce and numerical goals for management.” –Point #11 of Deming’s 14 points
When I picked up my car from the shop earlier this week, I learned a bit about the service center’s pay structure for its employees:
- Service center representatives (the people up front) are paid by the ticket that they personally write up. They are paid more for bigger tickets (i.e. bigger jobs).
- Maintenance technicians are paid a set amount for a job. For example, they get about half an hour’s credit for doing an inspection.
- If there is an error (e.g. the wrong part was used), then no one gets paid.
Certainly every service center isn’t structured this way. But think about the implications of this pay structure:
- There are two service center representatives and they therefore compete. Maybe they have an uneasy truce where they alternate cars that come in. If one of them found a better/faster way to work, they may not tell the others so that they have an advantage.
- The service center representatives have incentives to take in as much work as possible, regardless of whether the maintenance technicians have the time to do the work.
- Maintenance technicians have a strong incentive to work quickly rather than thoroughly.
- Who knows how the work is assigned to the maintenance technicians. For example, in this system you’d want the highest paying jobs for the actual time required. Maybe if they are friends with the service center representatives then they get the better work. Or maybe there is some other arrangement.
- As Deming found, over 90% of all defects are not attributable to one individual. In the case of the bad part, the wrong part may have been ordered (by a different department) or the upstream warehouse may have provided the bad part.
- Many of these people may want to do a really good job, but the incentives may discourage them from doing a good job. For example, there may be a better way to divide labor between the service center representatives.
Several years ago I read Deming’s “The New Economics,” which I re-read last year. Deming insists that pay should not be tied to performance. This runs counter to almost every company’s practices: Deming would argue that people should not receive a performance review much less be given a score, much less have their pay affected by a score.
The argument is simple: one person’s performance is greatly affected by factors outside their control. A salesperson makes a sale in part because their flight wasn’t delayed and because engineering rolled out a new product to sell. A technician crashes a server because they were told to “do it now” by their manager. A manager hits their sales targets because the economy is rebounding.
Deming believed that people have a natural desire to do well in their jobs, and that if you explain the situation well and clarify expectations then they will step up to the task. They will find things that you can’t see that will make your organization more effective. For example, someone responsible for data entry might find a way to automate their job–how do you support them for being creative rather than eliminating the now-unneeded position?
If you or your organization can’t resist incentive structures, at least try to align your incentives to organizational outcomes: by bonuses for everyone based on organizational performance, for example, or by replacing tips with across-the-board pay increases.