The goal of organizational architecture is to create an organization which will be able to continuously create value for present and future customers—essentially creating systems that will optimize and organize themselves. Organizational Architecture involves three important aspects: the assignment of decision rights (who makes what decisions), the methods of rewarding individuals, and the structure of systems to evaluate the performance of both individuals and business units. Corporate America has re-engineered decision rights fairly well over the last 15 years by flattening out organizations and shifting manager responsibilities. However, most companies are falling painfully short when it comes to administering rewards and evaluating performance.
Rewards are extremely important in corporate America. Rewards can be anything from receiving a restaurant gift card for finishing a project, to getting a 100-inch plasma TV for being the best sales person in the nation that year. In order to make a reward system successful three things must be true (expectancy theory). The first is that employees must feel that if they put in the requisite effort, that they will be able to achieve the desired performance level. Second, they need to trust that if they achieve the desired performance level, they will receive the reward from the company. Third, the valence of the reward must be such to motivate the employee to put in the effort in the first place.
Increased emphasis in American corporations is being placed on incentive pay, or performance-based pay, in an attempt to incent workers to achieve maximum results (or at least perform above the minimum level required). One of the problems with performance-based pay is that in order to institute a policy of rewards, the company has to put some of each employees’ pay at risk—money is taken right off the top of their salary, and now they have to earn it by performing, in many cases, at a higher level than they have in the past. This problem is often alleviated by the company building in the ability for the employees to earn more than they used to earn by achieving the highest performance threshold. However, this system is suboptimal for employees who will never be able to perform up to the highest level, no matter how hard they try. Although some degree of turnover is beneficial and necessary, most organizations can’t afford to lose up to 50% of their workforce at one time. For this reason, sometimes companies will implement an incentive program without putting any of its employees’ money at risk all—simply by adding the incentive on top of regular compensation.
So why doesn’t every organization use a pay for performance system? Critics of incentive pay have two arguments: the first argument is that money does not necessarily motivate employees; and the second is that it is difficult to design an effective compensation plan that truly rewards the highest performers. To me, the second argument is a lot closer to reality than the first. With increasing reliance on teamwork in companies today, the already vague line between acceptable and poor performance is getting evermore hazy. For this reason a system for performance appraisal is vital to organizational architecture. In order for a performance appraisal system to work, the employee or team output must be observable at low cost and difficult to manipulate by employees or the company. In addition, when evaluating teams of employees, a measure of team performance is required while still recognizing individual contributions to the team. For example, giving individual bonuses for work toward the team goal, and then giving a separate team bonus if the team reaches its goal.
Where most incentive programs fall short is in the expectancy link between achieving performance and being rewarded. That is, when a company asserts that high performance is necessary to stay in business, but does not reward high performers, what does that say to those high performers who could go to another company and perform at the same level and be rewarded for it? The opportunity costs for high performers to work at companies that do not adequately compensate for performance are the rewards (money, recognition, job security) they could be receiving elsewhere for the same effort. To me, the extreme disconnect between performance measures and rewards is what will drive these companies out of business.
It all comes back to operant conditioning: why would the mouse keep trying to learn how to get out of the maze if she never got cheese when she found her way out? Business leaders need to invest the requisite time and resources needed to design a maze that truly separates the high performing mice from the poorer performing ones. Then, give your mice the cheese they deserve!
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