It pays to pay for performance

Musings on carefully implementing financial incentives

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It pays to pay for performance

I had a pretty sweet side-hustle when I was young.

My parents would give me money after a successful report card. This was an empire of opportunity that would afford me at least one video game a semester. Serious business.

I was a pretty subaverage student then. At some point, I figured out the amount of effort you actually needed to put into school to graduate. Sure, you could get an A by breaking your back studying, or you could collect a swift B/C by doing the work on the bus.

This trade-off afforded me extra time to bike to K-Mart with my friends, or maybe even play a little extra Halo 3 before bed.

The additional effort in my studies wasn’t really worth it because I fundamentally believed I did not stand to gain anything additional for better grades.

(Of course: I’ve now watched peers get full-ride scholarships due to their exemplary grades, but try convincing an 11 or 13-year-old to care about that.)

But at one point, my parents (seemingly) became wise to it. And they offered a bit of additional money for a job well done on my report card. On top of that, Family Video™ gave a free movie rental for each A earned — Sweet! It became time to get to work.

And just like that, I went from an apathetic student to someone who took their education very seriously. And honestly, this ethic became a part of who I was. At a certain point, I was making my own income and a report card bonus wasn’t on the table anymore. But I kept studying, I kept working hard, it was ingrained in me.

So for my family, this was largely a win-win. For a negligible amount of effort and money, my parents didn’t need to nag me about my grades. And for me, I was accruing quite the amount of frequent-flyer points at Gamestop.

So if they are so powerful why aren’t more people — and organizations — leveraging them?

There are dangers to financial incentives

They’re impossible to get right. A good financial incentive will completely change someone’s mindset. It can turn an apathetic student into one of the most studious kids in the graduating class. Or it can even turn a lazy, underperforming salesperson into the next Grant Cardone.

But that’s just the issue. I’ve heard (and seen it) time and time again. Establishing a program is incredibly easy, but executing well on financial incentives is incredibly hard. For companies, either the organization will risk miscalculation on the potential payout or they won’t be capable of calculating it programmatically.

Most companies piloting an incentive program will turn to spreadsheets. I know because I’ve built them for this exact purpose. (picture courtesy of Sales Cookie)

Building, let alone operating & managing these programs, will take an analytical mind and a concerted effort each week. And run it wrong, or trust too much in your formulas, and you run the risk of an under/overpayment. Both of which can be crippling.

And outside of the technical buildout, managing these programs (in excel or not) requires a thoughtful mind. One wants to build a system that will serve to benefit the employee for a job well done, but won’t put the company under should the employee begin to seriously perform.

A careless calculation could put a company under. Seriously.

Of course, my Dad didn’t stand to lose much putting down $10 for an A. But organizations stand to risk a lot when they’re putting down hundreds, if not thousands, for successful deals.

But if one can effectively mitigate risk, a financial incentive program can blow the roof on an individual’s output and ultimately, financial performance.

Don’t be afraid to get crazy with it 

Companies can also consider letting go of some profitability in order to increase the financial incentive for an employee.

I was chatting with a friend the other night, and he mentioned that he had been considering looking for a new job for some time now. His work had stagnated, it felt repetitive, and his manager was unappreciative. A cocktail of employee apathy.

But the company recently announced a massive stock incentive tied to regional performance. He swiftly became excited again and is already discussing what a promotion might look like someday.

A company paying out a small amount of their profit to retain a hard-working employee who could use the extra money? This is someone who, weeks ago, had a future plotted without said company in mind. Yeah, the program is working.

I’ve also observed companies share these metrics in public to brew competition. While many of us are largely driven by money, many of us are also intensely competitive creatures. This is a viable and encouraging strategy.

For athletes, perhaps it’s a bet on miles run.

For writers, perhaps it’s a bet on words written.

For salespeople, it could be a YoY increase in revenue.

At the end of the day, tie the financial incentive to output and have fun with it.

Implementing them carefully & effectively

So with all of that in mind, how do you execute a financial incentive effectively? How do you incentivize the best behavior, top performance, without toxicity? Three things come to mind for organizations:

1. It is well documented, planned, and communicated about

2. You have an easy way to track and report on the performance

3. You have calculated the risk of a successful program

As long as it is easily visible / calculated by all parties, can’t spawn risk that would jeopardize the company, and everyone is bought in: the program will do well.

There is one last important distinction to be made here that many do not realize.

Not everyone is incentivized by money. It’s incredibly important to actually figure out what ultimately drives everyone and pull that lever whenever possible.

Some value money and what it can afford them.

Some value freedom and time away.

Some perhaps experience and responsibility.

Some, just can’t be bothered at all.

However, for the vast majority: we tie value on how we get our income. When we built Writer’s Bloc, it was largely driven by passion at first. Which is how it should be. But I would be lying if I told you each additional membership doesn’t add a little more pep to my step.

But just like a bonus for a report card, eventually one will have to self motivate.

A Benjamin will never beat out an intrinsic desire to create great.

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Your standards are too high

I strongly urge every high-performer to read Your Standards are Too High by Neel Nanda. This type of writing is exactly what I’m striving for.

Ultimately, the essay speaks to the reality that we shouldn’t feel dissatisfaction and guilt without some semblance of why. That our standards, formulated on baseless data, are actually holding us back from our goals and objectives.

A few of my takeaways to share:

“Some part of me is deeply convinced that everything should be easy, and fast. That if it’s not, I am failing. That I could have done better.”

I deeply resonate with this. Even when I turn projects in on time, or excel at a task, I know that there is someone better that could have accomplished it with greater clarity and speed than I. But I believe this for no good reason except there are others more talented than me. It’s a complete farce that isn’t serving me.

“Another framing: Guilt is a form of negative reinforcement, and satisfaction is positive reinforcement. Over time, we learn to avoid negative reinforcement, and to seek positive reinforcement - at our heart, we're all reinforcement learning agents seeking reward.”

And so our guilt and shame in a project become cyclical. We become critical, don’t perform, and inevitably look to avoid that learned behavior to avoid guilt. Because of this, we slip into a posture of fear and no longer create as we should.

Remember: Anything in life worth having is worth working for.

“True competence isn't avoiding problems, it's being able to recover when they inevitably arise.”

When an issue arises in my career and life, I might immediately conclude: “this wouldn’t happen if I knew what I was doing.”

But remember, an expert mechanic didn’t become so by having a perfectly maintained vehicle. Every mechanic faces car issues from time to time - and most encounter new challenges each and every day.

We’re battle-tested by a road-side repair, not by a car in the garage.

Until next time,

Cullin