January | 2011 | HR Soot

The Crystal Ball

First, I ask that you take out your crystal ball. What do you mean you don’t have a crystal ball? I thought that all leaders were expected to obtain, and maintain a crystal ball in good working order? Okay, even if you don’t own a crystal ball, think about the last time that you made a prediction that came true. Were you able to see how certain events might fit together in a way that others did not see? How did the situation actually unfold? Were you able to influence others and rescue the day, or did you sit back and watch the situation unfold precisely as you thought it might?

Enough questions – you can put your crystal ball back into your desk drawer until you need it for the next strategic planning cycle. Ever since I have been interested in leadership, I have read about the need for leaders (particularly senior leaders) to develop high-level, strategic visioning capabilities to direct their organizations to the right places. There is a fair amount of literature that addresses leadership vision, and the ability to effectively communicate that vision across the organization. Much of the literature suggests that a critical element of effective leadership lies in one’s ability to get her followers to see the same vision, and to take the right actions toward making that vision a reality.

What’s sometimes missing is a focus on the importance of influencing leadership peers, colleagues, and even your supervisor. This is precisely where the topic of leadership can take a quick turn to the left.

The Train Wreck is Coming

For many years I made future predictions as part of my annual planning and goal-setting process. I have gone so far as to write my predictions on a piece of paper, which I filed away until the next planning cycle (yes, I kept score). While I have not always been correct about all of my predictions, I have often surprised myself about how accurate I was about certain things. I have been told that my ability to synthesize meaning out of disparate and complex realities is one of my strengths.

The problem is that I have seen parts (sometimes significant parts) of the train wrecks that I predicted come true. I have predicted wrecks, communicated the possibility of the wrecks (early), have tried to influence other leaders to avoid the wrecks, but have still (in some cases) sat back and watched the train wrecks occur (usually in slow motion).

On one hand, I have been quite smug about my predictions and the reality that others did not believe me, trust me, or work with me to avoid it – it has occasionally led to the highly satisfactory conversation that ends with the phrase, “I told you so.” As if this somehow makes me feel smarter, or at least more perceptive than others. On the other hand, I’ve realized that this isn’t really evidence of my visioning capability as much as it is an indication of my own leadership failure. The failure to influence other leaders.

Leadership Requires Influence

Influence does not attach to a fancy title; this is especially true concerning your ability to influence others who have fancy titles, perhaps even fancier than yours. While many leaders rely on the power to influence direct reports through postional authority, or other extrinsic factors linked directly to their role (see Performance-Based Compensation), influencing those over whom you have no authority becomes more about knowing, and playing “the game.”

Yes, I am talking about organizational politics. You see, influencing leaders is more than setting and communicating vision; influence is more than having credibility; it is more than having knowledge; and, it is more than executing strategy in your areas of control. Influence is having the moxie to navigate the political landscape that exists in every organization, from your church, to your employer. It includes the ability to develop personal relationships, stroke the right egos, form alliances, and navigate the invisible undercurrents that force the flow of influence within the organization. You can be a great visionary, and a great communicator, but if you refuse, or do not know how to play the game, you are really nothing more than a pundit; you will lack any real influence.

Why HR Needs to Play Politics

I know that the concept of organizational politics makes many HR folks uncomfortable, so let me get this out of the way: HR leaders need to become politically effective. Unfortunately, many have categorically associated organizational politics with everything that is wrong and evil; after all, isn’t it HR’s role to remain neutral (see Time for HR Leaders to Put it In Gear to hear my rant about that one)? In case you missed it, my answer is a definitive NO.

Political games aimed at perpetuating discrimination, inequity, or immorality need to be stricken from our organizations and society at all costs. Period. But, even when we are successful on those fronts, politics will remain a driving force in our organizations. The question may then be how we leverage the political influences for the good of the organization, and its people (i.e. how do we become more influential). My working hypothesis is this: in order to be effective at influencing leaders and decision makers, one needs to effectively thrive in the political system. Vision is only effective as a leadership strength to the extent that one can truly influence the right people to lead by it.

What do you think?

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HR Soot Theory: Many of the “HR” programs in existence today were developed by consultants and attorneys for the benefit of said consultants and attorneys.

We Assume Performance-Based Compensation Works

If you don’t spend a lot (or any) of your working time in the world of compensation, let me suggest to you that designing and administering compensation programs is complex work. There is no shortage of strategies, programs, theories or approaches to performance-based compensation (PBC) plans, and new programs are being developed continuously.

To illustrate the range and complexity of PBC plans, just a few higher-level approaches may include: merit-based increases; gain-sharing plans; short-term incentives; long-term incentives; individual incentives; team incentives; deferred compensation; stock options; and, the list goes on. One thing that I know from HR experience is that many of the compensation consultants and labor attorneys who design and advise companies on these arrangements charge a mint. I also suspect that very few business people ever challenge the effectiveness of PBC strategies – it is largely accepted as relevant and effective, without consideration or debate.

Agency Theory

PBC systems are largely based on Agency Theory. Larkin, Pierce and Gino describe it in the working paper, The Psychological Costs of Pay-for-Performance: Implications for Strategic Compensation:

At its core, agency theory posits that compensation is strategic due to differences between firms and employees in two crucial areas: objectives and information. The differences lead to two sources of potential inefficiency for firms: an employee may not put out maximum effort (or effort may be misdirected in an inefficient manner), and the firm may pay workers more than they are worth (i.e. their expected marginal product) (Larkin, Pierce, & Gino, 2010).

In a simple sense, the theory suggests that the right strategic pay is that amount which motivates people to do their best work (not withholding effort), without paying them more than the organization has to pay them to get it – it goes to profitability. It also assumes that employees will generally withhold their best efforts if the pay does not match the perceived effort necessary to do their jobs well. Larken, et. al opine that “while agency theory provides a useful framework to analyze strategic compensation, it fails to consider a host of psychological factors that affect employee motivation and attraction” (Larken, 2010).

Trench HR Reality

After many organizations spend large amounts of money designing and implementing these compensation systems, they can also require extraordinary resources to administer; the more complex the systems are, the more resources it requires to measure, monitor, calculate, pay and communicate performance and compensation elements. The theory is that companies will pay for the performance measures that are already tracked and reported; the reality is that often times additional tracking and measurement systems are necessary. How much time and money does your company really spend to complete performance appraisals that tie into merit-based increases? How effective is the system for driving better business results? How do you know?

I understand that some organizations have entire departments devoted to managing PBC systems. Inevitably, it is Human Resources who becomes the compliance police for the timely completion of performance appraisals (including those linked to compensation increases). I’ve even heard of some organizations that have “the timely completion of performance appraisals” as short-term incentives for their managers. How’s that for aligning the right behaviors?

I’m not suggesting that setting goals, measuring results and communicating constantly with employees is a waste of time – I think it is critical to the success of any business. In fact, I think most organizations largely fail at doing this well. The problem lies in the fact that it is often the PBC programs that force the setting of goals instead of the right business objectives and outcomes driving the total reward strategies.

The Research

Over many years, I have asked executives, managers and compensation consultants what the key is to a successful PBC plan. Here is what I most frequently hear: Plans must be clearly aligned with the strategic objectives of the organization such that the rewards will drive the right behaviors. If we take it down a couple of levels (beyond competitive executives and well-paid compensation consultants), here is what some of the academic research suggests about PBC.

Alfie Kohn, in his article Why Incentive Plans Cannot Work suggests that there is a six-point framework to examine the true costs of an incentive program: (1) Pay is not a motivator; (2) rewards punish; (3) rewards rupture relationships; (4) rewards ignore reasons; (5) rewards discourage risk-taking; and, (6) rewards undermine interest. He states, “According to numerous studies in laboratories, workplaces, classrooms, and other settings, rewards typically undermine the very process they are intended to enhance. The findings suggest that the failure of any given incentive program is due less to a glitch in that program than to the inadequacy of the psychological assumptions that ground all such plans” (Kohn, 1993).

Like Larken, et. al., Kohn argues that the key missing element in incentive compensation plans is the consideration of other psychological factors. ”Do rewards work? The answer depends on what we mean by ‘work.’ Research suggest that, by and large, rewards succeed at securing one thing only: temporary compliance” (Kohn, 1993).

Daniel Pink, in his book Drive describes an experiment conducted by Edward Deci for his dissertation on the subject of motivation; he hypothesized that scholars and business people misunderstood the subject. Pink says, “Deci revealed that human motivation seemed to operate by laws that ran counter to what most scientists and citizens believed” (Pink, 2009). He goes on to write:

What Deci found, and then confirmed in two additional studies he conducted shortly thereafter, was almost the opposite. ‘When money is used as an external reward for some activity, the subjects lose intrinsic interest for the activity,’ he wrote. Rewards can deliver a short-term boost – just as a jolt of caffeine can keep you cranking for a few more hours. But the effect wears off – and, worse, can reduce a person’s longer-term motivation to continue the project” (Pink, 2009).

Challenging the Status Quo

PBC is only one of many areas where I believe it is time to challenge the status quo. Businesses adopt, and HR administers a number of programs, systems and processes that have not been challenged rigorously, and have not been updated in far too long.

Agency theory and PBC is 20th century thinking. What does it say about your organization to base your total reward structure on the theory that your employees may be inherently lazy, intentionally withholding their talents, and are only willing to give you their best effort when it is tied directly to compensation?
If you want a top performer then hire a top performer, pay her like a top performer, give her the resources required to be a top performer, and get out of her way. Dangling incentives to motivate her to jump over the obstacles that you’ve probably created is not going to make her more productive.
Clearly aligning the goals and objectives of your leaders and employees with the strategic objectives of the organization does not create a successful PBC system, it creates the environment for a well-lead organization.
We have made things far too complicated with fancy compensation schemes, for which there is questionable objective evidence in support. If we cannot explain compensation to a new employee in five minutes or less, then it is too complicated. If employees don’t understand the system, how can we expect it to motivate their performance?

I am very interested in hearing what you think.

References

Larkin, I., Pierce, L., & Gino, F. (2010). The psychological costs of pay for performance: Implications for strategic compensation. Harvard Business School: working paper.

Kohn, A. (1993). Why incentive plans cannot work. Harvard Business Review; Sep/Oct 93, 71(5), p 54-63.

Pink, D. (2009). Drive: The surprising truth about what motivates us. New York: Riverhead Books (Kindle Edition).

[Photo Credit: Maggie Smith at Freedigitalphoto.net]