I was quite surprised to hear the story about United Airline’s move to replace their bonus system with a lottery. Yes, you read that right. There is plenty to read about this already (see Adam Grant's LinkedIn post) but this story and other trends in the rewards space highlight a fundamental problem with the way organizations look at rewards and how they motivate. I couldn’t resist the opportunity.
So why is United running away from their current bonus program? It isn’t exactly clear but they certainly think size matters ($100,000 and a Mercedes C Class?) and benchmarking results support their claim. Many organizations give their reward programs low marks and many cite small budgets as the root cause. Companies feel if they could just get big enough budgets (presumably to differentiate rewards more) their programs would be wildly successful. Many of these same companies are currently rethinking their merit pay programs for the same reasons, assuming that a 3% merit increase can’t possibly motivate employees. Organizations that are questioning their merit pay programs are talking about replacing them with spot bonuses that give employees bigger reward hits than the monthly payout of a 3% merit increase, and they aren’t permanent.
The mistake leaders and HR professionals make is assuming employee motivation is about rewards. They assume there is a pot of goodies and the motivational energy to be released is based on the size of the pot…bigger pot, more motivation, smaller pot, less motivation. Research suggests it doesn’t work this way. Pay has a very low level relationship to satisfaction and it has been said the half-life of a pay increase is about 10 minutes. People adapt to the higher levels of pay and status is more important than money. What really matters is that your bonus was bigger than your neighbors.
There is also an interesting irony in United’s move. Edward Deming famously maintained that 94% of individual performance outcomes are attributable to the system in which employees work. His comments (and other research) suggest luck has a lot to do with individual performance and success. So it is fitting that in order to be eligible to hit the United bonus lottery employees first need to hit the performance lottery. Actually, employees need to hit several lotteries. First they need to hit the supervisor lottery. They need to be lucky enough to have a boss that provides them the feedback, coaching, and the support they need with few biases and other fatal flaws. They need to hit the project lottery as well, getting lucky enough to work on the plum, highly visible projects that have all the sponsorship and support. And they need to hit the coworker lottery, getting lucky enough to work with people who do their part, work hard and do what’s necessary to support the goals of the project. At a minimum, they need to work with people who don’t undermine them and their work. They also need to hit the product or service lottery, working with the products and services everyone cares about—the new, lucrative ones, not the ones at the end of their life cycle. They also need to hit the customer lottery, supporting customers that buy expensive products and services, buy more of them, more often, who are easier to partner with and complain less. Finally, they need to have good timing, hitting all these other lotteries at a time when business is good, competitors stumble or regulators go easy on them.
But hitting these lotteries may not be enough. If employees are unlucky enough to have their performance be judged by their supervisor (and who isn’t) then they will need still more luck. The problems with supervisor ratings of employee performance are well known by now. These ratings have little to do with the employee performance and a lot to do with the supervisor idiosyncrasies and biases as well as employees luck in winning the lotteries I described above. Supervisor ratings of employee performance are mostly noise--they are in fact, a lottery. There may as well be a machine in your boss’s office with 5 ping pong balls in it. When it’s your turn, they press the button and out comes a ball out with your rating on it.
So for many companies, success is a lottery anyway and it just got worse for United employees since their payout is now a lottery as well. What could they do instead? Put more money in base pay where employees would rather have it anyway (they are risk averse). Give them cost of living adjustments and market-based pay increases. United is already doing something right with their profit sharing bonus and what looks like a gain-sharing bonus program (tying bonus payouts to specific measures like on-time departures). These programs work and don’t have the nasty side effects of individual pay-for-performance programs.
The key with these programs is not to think about them as tapping financial motivational energy. They can be designed to tap other important motives. When you share profits or cost savings with employees for achieving goals that are important for the company and customers, you create a sense of purpose and you build a spirit of cooperation and belonging to teams, organizations, and to the company. The money is secondary so it doesn’t matter that it isn’t $100,000 or a Mercedes C Class. What’s important is all employees are working toward something bigger than themselves and they work hard because they don't want to let their coworkers, their company, or their customers down. A lottery can’t match this kind of power.
References and Readings
Miller, S. M. (2016). Employers seek better approaches to pay for performance. SHRM, Feb 8. (https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/better-pay-for-performance.aspx).
Judge, T. A., Piccolo, R., Podsakoff, N. P., Shaw, J. C., & Rich, B. L. (2010). The relationship between pay and job satisfaction: A meta-analysis of the literature. Journal of Vocational Behavior, 77, 157-167.
Deming, W. E. (1994). The new economics (2nd Edition). Cambridge: MIT Center for Advanced Engineering Study.
Clark, A. E., Frijters, P., & Shields, M. A. (2008). Relative income, happiness, and utility: An explanation for the Easterlin paradox and other puzzles. Journal of Economic Literature, 46, 95-144.
Kahneman, D. (2012). Thinking, fast and slow. New York: Farrar, Strauss and Giroux.
Taleb, N. (2007). The Black Swan: The impact of the highly improbable. New York: Random House.
Buckingham, M., & Goodall, A. (2015). Reinventing performance management. Harvard Business Review, April, 40-50.
Adler, S., Campion, M., Colquitt, A., Grubb, A., Murphy, K., Ollander-Krane, R., & Pulakos, E. (2016). Getting rid of performance ratings: Genius or folly—a debate. Industrial and Organizational Psychology, 9, 219-252.