By January 31, 2009 6 Comments Read More →

Great Piece on the Failings of Incentives

Why Incentives Are Effective, Irresistible, and Almost Certain to Backfire | Fast Company

Just about when I start thinking “Is Fast Company magazine relevant anymore, should I renew my subscription?”, a gem like this appears.

It’s a very old lesson, tracing back through Dr. W. Edwards Deming, but it’s yet another Deming lesson that wasn’t listened to. Dr. Deming taught, amongst his 14 points:

10) Eliminate slogans, exhortations, and targets for the workforce asking for zero defects and new levels of productivity. Such exhortations only create adversarial relationships, as the bulk of the causes of low quality and low productivity belong to the system and thus lie beyond the power of the work force.

11a) Eliminate work standards (quotas) on the factory floor. Substitute leadership.

11b)Eliminate management by objective. Eliminate management by numbers, numerical goals. Substitute leadership.

If you’re a regular reader, you know I love stories about people gaming the system. Not because I think gaming the system is great, but because it illustrates that there’s always a dysfunctional way of merely hitting the target. Click the “Gaming the Numbers” link at the bottom of this post for more examples and stories.

It’s great to see Fast Company tackling this issue. Check out the full piece, but I’ll quote this story in honor of Super Bowl Sunday:

Ken O’Brien was an NFL quarterback in the 1980s and 1990s. Early in his career, he threw a lot of interceptions, so one clever team lawyer wrote a clause into O’Brien’s contract penalizing him for each one he threw. The incentive worked as intended: His interceptions plummeted. But that’s because he stopped throwing the ball.

Is a story like this urban legend? Any Jets fans from that era willing to corroborate the story? If you look at his career stats, his interceptions did drop from 1986 to 1987. He threw 20 in 1986, which probably spurred the incentive deal.

But keep in mind that O’Brien only played 12 games in 1987 after playing all 16 in 1986. His interception ratio (percentage of pass attempts intercepted) dropped, which is probably the measure they should have used if they were going to use one. But, then his incentive is to try only “safe” passes, which could have a ton of side effects for a football team. Funny story, though, and food for thought.

The authors (the Heath brothers, authors of Made to Stick: Why Some Ideas Survive and Others Die) do a fantastic job of making the case that incentives, particularly those focused on a single objective, are dangerous. A good lesson for all managers and all organizations. But what can we do? Management by Objectives is so ingrained in most organizations…. have you succeeded in eliminating targets and incentives?

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Mark Graban's passion is creating a better, safer, more cost effective healthcare system for patients and better workplaces for all. Mark is a consultant, author, and speaker in the "Lean healthcare" methodology. He is author of the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, as well as The Executive Guide to Healthcare Kaizen. His most recent project is an eBook titled Practicing Lean that benefits the Louise H. Batz Patient Safety Foundation, where Mark is a board member. Mark is also the VP of Improvement & Innovation Services for the technology company KaiNexus.

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6 Comments on "Great Piece on the Failings of Incentives"

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  1. Andrew says:

    Mark:

    I just had this conversation with a group of managers on Thursday – so, thanks for the reinforcement!

    I’ve just been given responsibility for our Latin American operations, in addition to my current assignment in the States, so I was down there to get better acquainted, ask questions, and help with teaching something of our understanding of Toyota Way, by way of launching a deployment of “lean”.

    The discussion on incentives arose from a plan they presented to measure performance in the different zones of the operation, and use it for quarterly feedback and incentive pay.

    So, I asked questions:
    Why would you wait for 3 months to give feedback, when the shortest possible cycle of PDCA gives the most rapid improvement? Why wait to correct a problem?

    What if one zone has greater challenges than another, as is inevitably the case? Does the person with the greater challenge get less pay because results aren’t as good?

    And most important, because it cuts to the whole purpose of the lean deployment, what does this system encourage employees to do when they see a problem in their area?

    HIDE IT!! Or develop an approach to blaming someone else. As you have said, they will game the system.

    If we are trying to create a community of TRUST, where problem identification is paramount and honored, then incentives for individual performance are the wrong tactic.

    Measure the process, not the people. Take responsibility as managers for defects in the system that limit performance. Drive out fear.

    It’s all there in Deming and Toyota, and, for that matter, Patrick Lencioni’s stuff on team work.

  2. rearden215 says:

    Isn’t one’s takt identical to production quotas?

    And, yes, ‘Fast Company’ magazine has yet to move away from 1998 and seems sadly lost amongst those of us renewing the effort to manufacture and increase value here in the United States, rather than just selling each other hats.

    I actually have skilled welders coming to me for work and that is a nice feeling.

  3. Andrew says:

    No, takt time is not identical to production quota for individual performance, which is the context here. When takt time decreases due to increasing demand you can add operators, modify process, whatever, without necessity of creating overburden or increasing individual quota.

    Maybe there is some numerical equivalence of standard cycle times and quotas, but not a philosophical equivalence if departure from standard is used as the basis for analysis and problem solving but missed quotas are used to limit or reduce incentive pay.

  4. liz guthridge says:

    Great post! Another classic on the topic of incentives–while it doesn’t come from traditional LEAN–is Steven Kerr’s article, “On the folly of rewarding A, while hoping for B.” http://www.sba.oakland.edu/Faculty/york/Readings434/Readings/On%20the%20folly.pdf

  5. Mark Graban says:

    I agree with Andrew on Reardon’s question.

    Takt is merely the understanding of the rate at which the customer wants to buy your product.

    You want to produce at takt (or slightly faster, actually, as a cycle time). What you do with the cycle/takt plan is all the difference.

    If the cycle time is a mandate (thou MUST produce 100 per hour), then it’s quota and all sorts of bad things can happen (poor quality, gaming the numbers, etc.).

    If the cycle time is a goal, but people are allowed to work in a system in a responsible Lean way, then it’s not a quota.

    It’s all in how you manage it.

  6. Evan J Miller says:

    Of all of Deming’s teachings, this one on incentives is one of the hardest for most people to swallow. Great post.

    This post and others like it are why I’ve listed your blog in my “Best of the Lean Blogosphere” at http://www.hertzler.com/blog/dataheads/index.php/2009/02/best-of-the-kaizen-blogosphere/

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