Incentive Pay Considered Harmful

Mike Murray, a surprisingly hapless HR manager at Microsoft, made a number of goofs, but the doozie was introducing a “Ship It” award shortly after he started the job. The idea was that you would get a big lucite tombstone the size of a dictionary when your product shipped. This was somehow supposed to give you an incentive to work, you see, because if you didn’t do your job– no lucite for you! Makes you wonder how Microsoft ever shipped software before the lucite slab.

The Ship It program was announced with an incredible amount of internal fanfare and hoopla at a big company picnic. For weeks before the event, teaser posters appeared all over the corporate campus with a picture of Bill Gates and the words “Why is this man smiling?” I’m not sure what that meant. Was Bill smiling because he was happy that we now had an incentive to ship software?  But at the company picnic, it became apparent that the employees felt like they were being treated like children. There was a lot of booing. The Excel programming team held up a huge sign that said “Why is the Excel team yawning?” The Ship It award was so despised that there is even a (non-fiction) episode in Douglas Coupland’s classic Microserfs in which a group of programmers try to destroy one with a blow torch.

Treating your rocket scientist employees as if they were still in kindergarten is not an isolated phenomenon. Almost every company has some kind of incentive program that is insulting and demeaning.

At two of the companies I’ve worked for, the most stressful time of year was the twice-yearly performance review period. For some reason, the Juno HR department and the Microsoft HR department must have copied their performance review system out of the same Dilbertesque management book, because both programs worked exactly the same way. First, you gave “anonymous” upward reviews for your direct manager (as if that could be done in an honest way). Then, you filled out optional “self-evaluation” forms, which your manager “took into account” in preparing your performance review. Finally, you got a numerical score, in lots of non-scalar categories like “works well with others”, from 1-5, where the only possible scores were actually 3 or 4. Managers submitted bonus recommendations upwards, which were completely ignored and everybody received bonuses that were almost completely random. The system never took into account the fact that people have different and unique talents, all of which are needed for a team to work well.

Performance reviews were stressful for a couple of reasons. Many of my friends, especially the ones whose talents were very significant but didn’t show up on the traditional scales, tended to get lousy performance reviews. For example, one friend of mine was a cheerful catalyst, a bouncy cruise director who motivated everyone else when the going got tough. He was the glue that held his team together. But he tended to get negative reviews, because his manager didn’t understand his contribution. Another friend was incredibly insightful strategically; his conversations with other people about how things should be done allowed everyone else to do much better work. He tended to spend more time than average trying out new technologies; in this area he was invaluable to the rest of the team. But in terms of lines of code, he wrote less than average, and his manager was too stupid to notice all his other contributions, so he always got negative reviews, too. Negative reviews, obviously, have a devastating effect on morale. In fact, giving somebody a review that is positive, but not as positive as that person expected, also has a negative effect on morale.  

The effect of reviews on morale is lopsided: while negative reviews hurt morale a lot, positive reviews have no effect on morale or productivity. The people who get them are already working productively. For them, a positive review makes them feel like they are doing good work in order to get the positive review… as if they were Pavlovian dogs working for a treat, instead of professionals who actually care about the quality of the work that they do. 

And herein lies the rub. Most people think that they do pretty good work (even if they don’t). It’s just a little trick our minds play on us to keep life bearable. So if everybody thinks they do good work, and the reviews are merely correct (which is not very easy to achieve), then most people will be disappointed by their reviews. The cost of this in morale is hard to understate. On teams where performance reviews are done honestly, they tend to result in a week or so of depressed morale, moping, and some resignations. They tend to drive wedges between team members, often because the poorly-rated are jealous of the highly-rated, in a process that DeMarco and Lister call teamicide: the inadvertent destruction of jelled teams.

Alfie Kohn, in a now-classic Harvard Business Review article, wrote:

… at least two dozen studies over the last three decades have conclusively shown that people who expect to receive a reward for completing a task or for doing that task successfully simply do not perform as well as those who expect no reward at all. [HBR Sept/Oct 93]

He concludes that “incentives (or bribes) simply can’t work in the workplace”. DeMarco and Lister go further, stating unequivocally that any kind of workplace competition, any scheme of rewards and punishments, and even the old fashion trick of “catching people doing something right and rewarding them,” all do more harm than good. Giving somebody positive reinforcement (such as stupid company ceremonies where people get plaques) implies that they only did it for the lucite plaque; it implies that they are not independent enough to work unless they are going to get a cookie; and it’s insulting and demeaning.

Most software managers have no choice but to go along with performance review systems that are already in place. If you’re in this position, the only way to prevent teamicide is to simply give everyone on your team a gushing review. But if you do have any choice in the matter, I’d recommend that you run fleeing from any kind of performance review, incentive bonus, or stupid corporate employee-of-the-month program.

About the author.

I'm Joel Spolsky, co-founder of Trello and Fog Creek Software, and CEO of Stack Overflow. More about me.