Jann's Blog: Dysfunctional Reward Systems

Question: What do Enron, Merrill Lynch, Countrywide, AIG, General Motors, and Chrysler have in common? Answer: The CEOS each received huge compensation packages as they led their respective companies to their demise. How do we explain the disastrous decisions that caused these iconic companies to collapse while being led by experienced, well educated people who had been entrusted by their shareholders and directors with the well being of these companies?

The best place to start is with the reward system. Since behaviors that are rewarded tend to be repeated, it is essential to examine the behaviors being rewarded that ultimately are embedded into the organizational culture. An Academy of Management Classic , “On the folly of rewarding A, while hoping for B” by Steven Kerr was published more than twenty years ago and it is more relevant than ever today:

We hope for … But we reward …

* Teamwork and collaboration The best team members (MVPs)

* Innovative thinking and risk taking Proven methods and not making mistakes

* Development of people skills Technical achievements and accomplishments

* Employee empowerment Tight control over operations and resources

A more recent article, “Be Careful What You Reward—You Might Get it” in the journal Leader to Leaderby Bob Nelson and Dean Spitzer, reinforced how leaders are still recognizing and rewarding the wrong things. Leaders want high-performance, but they tend to reward seniority. Leaders want high profits, but they reward any sales revenue, even when it might reduce long term profits. Leaders want employees to be problem solvers, but encourage problem hiding. Leaders want outstanding customer service, but they cut customer service budgets to save costs.

Even in higher education, we expect outstanding teaching. But unless it is a teaching institution such as Central College, research tends to be rewarded. In healthcare, we want wellness, but the reward system is based on profits which means many people are often denied treatment or medicine. This carries over into the workplace. Some organizations have a limited number of “sick days.” Why don’t we allow “well days” for those people who do not miss work because of illness?

The pressure to deliver short term profits and financial rewards clouded their vision to the point that these CEOS could not see or ignored the peril to the very survival of their institutions. Kerr maintains that reward systems continue to be dysfunctional for three main reasons:

* Our inability to break out of our old ways of thinking about reward and recognition practices.

* Our lack of a holistic perspective of performance factors and outcomes.

* Our focus on short-term results by management and shareholders.

As the saying goes, “You get what you reward.” So the question should be, “What behaviors do we want?” By asking this question, leaders can make sure that beneficial behaviors are rewarded and eliminate or penalize behaviors that can threaten an organization’s survival.

This is the bottom line: If we want ethical behavior, we need to recognize and reward it. If we want high performance, distinguish between long term success and short term profits. If we want creativity, reward creative ideas and solutions. Now more than ever, we need innovation and long term growth.

Look at how people are behaving. Then you will know what is being recognized and rewarded.