Talent Management: Incentives in a Systems Perspective

Edited 7 June, 2011.

Talent Management is a practice of managing social systems for specific goals and aims. Even though the practice part of TM includes securing suitable access to talent … The underlying issue is one of dealing with performance. A 3 June, 2011 article in the Vancouver Sun Titled “Reducing the risk of to our economy” by Roger L Martin, page A15 highlights this notion.

The article speaks to the notion of incentives and that in the case of managing hedge funds, it may best be achieved by incorporating incentives on the customers of hedge fund managers not just on the hedge fund managers themselves. This article was extremely provocative as it raises the issues of incentives in a way that HR rarely considers.

HR deals with employee performance in organizations and often administers the related incentive systems associated with this. What is typical though is the incentive systems are designed to direct and manage the “players” (i.e., employees) themselves. A person meets their performance goals and they benefit appropriately.

Yet there are any number of incidents where the most carefully crafted of performance management systems leads to unintended consequences. People individually gain the rewards and yet the organization does not necessarily do so. Sometimes it works in reverse – the organization wins, yet the way the performance contracts were established – individual employees don’t benefit very much. I won’t get into any specifics as anyone who is experienced with this area knows what I am alluding to, especially when it comes to senior executive compensation (were the individuals win regardless of how well the organization does).

This article raises the very interesting point that in some situations no amount of sophisticated incentive design on the hedge fund managers is going to ensure that appropriate risk/reward choices will be made over time. The article suggests that we put some form of incentives on the customers of hedge funds themselves. If the customers are properly incented, they will choose hedge fund manager decisions over time that are appropriate from a risk/ reward perspective. This is a remarkable notion, and it is totally a systems thinking one.

If we think of a system in its most simplest of configurations (input, system, output) we see the wisdom of the article’s suggestion. The system responds to the characteristics of the inputs providing and outputs receiving systems along with any internal performance managing processes. HR unfortunately is limited to only considering the system internal processes.

How do we begin to think about incentive systems as they may apply along the larger system’s players?

First I would suggest we accept the old adage: “Nothing is foolproof because fools are too damn clever!”

This adage suggests we should not try to be too clever in our efforts. Rather we should think about how we structure incentives so we get more of what we want and less of what we don’t want. This means we should look at the performance system results. This is in my experience not easily, readily or commonly recognized and accepted. I have seen performance systems persist even where there is overt evidence that these are creating untoward consequences. The result is often a form of “tinkering” where the system is made even more complex (i.e., try to make fool proof).

This leads to the second adage I believe is worth accepting: “Consequences matter in behaviour choices.”

Incentives are a form of consequence.

But let us look closer. What do we expect from incentive like conseqeunces?

  1. Attract appropriate people to participate. If our incentive system does not attract people to play, then we will not achieve what we hope for. Failure in this area leads to people ignoring us and or sabotaging (usually through gaming the system) us. I have observed both behaviours in what I would consider as reasonably designed incentive systems. So we should never assume that others will be “wowed” with our clever incentive system. I have observed where those who were the supposed beneficiaries of a new performance system were very concerned and under whelmed. What do you think happened? Yes the systems were invariably imposed. So we learn what? Surely it should be a mandatory requirement that these systems generate excitement in those who have to live under them.
  2. Encourage specific behaviours to the exclusion of others. If a performance management system does not direct those involved in appropriate directions then the system has failed. Understanding “how you want it” can be more important than understanding “what you want”. Why? Because understanding behavioural aspects provides us with insights on some of the potential unintended consequences (i.e., undesired gaming).

Why do I focus on behaviours over results? Because, in almost all cases, we care about how results are achieved too. In fact I would even argue that we should be oriented in our performance management systems to 80% behaviours and 20% results. I can achieve a financial goal through productive efforts or I could achieve them through some form of gaming or even fraud (strong word I know – but I want to make the point clearly). Gaming and even fraud takes place in organizations too ( I will let the reader contemplate the various forms these takes place – if you can’t come up with close to a dozen examples then you should not design and implement incentive systems in your organization). How we achieve results are strictly behavioural in nature. Any performance system that denigrates the role of behaviours by focusing on results is fundamentally dangerous and those who implement it deserve their outcome.

The above are the “light” side of the issue. There are two “dark” side forms to the two points above:

  1. Punish for/for not participating. Yes we have processes that do not leave it to chance whether a person will be a participant. Any form of reprimand or more serious consequence such as suspension, being fired, etc. is a form of incenting people to comply. Compliance is the best you can expect here, sometimes it is enough. We often do it in areas where there are hazards or safety issues. But we also do it by “socializing” means including bullying and more benign forms of social pressure.
  2. Punish for/for not some specific behaviours. In most organizations, they will use a severe form of response for anyone who tries to achieve results through abuse of others. When I was in construction during university I was struck by the strong social norms in place by work groups in terms of productivity limits. Incentive systems if they are to have any chance of success need to understand where these are and how they will likely play out in our particular performance system.

The two points made first, are intended to achieve “superior” performance. The last two “dark” side points are intended to provide “limit lines” performance below/above which it means you will not stay a member of the organization. We sometimes forget is that we can use these last two points to cap (provide an upper limit on) performance too. Although the term “punish” may be a bit strong, the design of the Qwerty key board was intended to limit typist speed so the keystroke keys would not jam. The notion of any system incorporates the notions of both upper and lower limits to performance. I have observed commission systems that shape their commission rates such that there is a decreasing marginal utility in exceeding certain sales rate goals. Similarly, I have noticed these very same sales people limit their overall monthly achievements because of the system’s unintended consequence (Can you think of what these might be?).

Commission systems are great for observing the brutality of unintended consequences. I have been burned by my inadequate efforts in the past. In fact one incentive system worked so well that people did nothing but sell as much as they could. You can imagine the unintended consequences of that.

The intriguing core message in this post though is how we can shape performance (the four points above) by looking outside of the “role of interest” system itself. We can shape system performance by how those who interact with the role alter their behaviour thereby setting performance shaping consequences on those in the system itself. This means we have another lever on TM performance itself. As TM practitioners, we should always keep this opportunity in mind.


About 123stilllearning456

As a management consultant I am passionately interested in talent management and risk/uncertainty issues. In the area of talent management I propose that we seek strategies that look beyond the staffing/employee centric frames of reference. I have been frustrated at the "closing down on possibilities" by these more conventional staffing/employee centric approaches. I have been impressed where people have found systematic solutions to their talent management issues by going beyond the conventional approaches. In the area of risk and uncertainty, I am interested in making this topic relevant to more normal decision making situations. My conceptual foundation is to use the micro-economist's fixed/variable cost theme. I also think it is important to look at these issues for people through their emotional and psychological lens. As a premise I think risk and uncertainty only exist where there is a person who cares about possible events and its consequences. Hence, risk and uncertainty are social based concepts (no sentience, no risk and uncertainty). A major influence on my thinking in this area is Nassim Taleb of "Black Swan" fame. This BLOG provides me with an opportunity to express my thoughts on topics that interest me. As this is an online diary, content is more important to me than polish. I apologize if this distracts from readers' enjoyment and learning. Still I find this a useful way to live up to my namesake, learn more from others and hopefully provoke creative thoughts and ideas in others.
This entry was posted in Decison Making, Risk & Uncertainty, Talent Manangement. Bookmark the permalink.

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