Break the model on employee behavior

My Financial Times column 10/4/10

Break the model on employee behaviour

Philip Delves Broughton

If ever there were a moment for companies to be experimenting with how they organise and motivate their employees, now would seem to be it. Businesses are being yanked in every direction by the forces of recession, emerging markets and new technology. Psychologists and economists are collaborating as never before to expand the field of behavioural economics, to tell us why we behave the way we do when it comes to work and money.

So why are more companies not using the crisis to rethink how they manage their people? Why are they so much more innovative when it comes to jiggering with their balance sheet or product line than human resources?

It is a question that is dumbfounding Dan Ariely, a professor of behavioural economics at Duke University and author of two books, Predictably Irrational and The Upside of Irrationality. Prof Ariely is one of management’s most widely cited behavioural economists, and he told me that while companies harried him for insights into customer behaviour, they were loath to try out anything new on their employees. “There is no worse place to try to do experiments than human resources,” he said. “The first thing on their mind when they hear the word ‘experiment’ is lawsuits.”

Some of Prof Ariely’s most interesting research has been in the area of compensation. He has concluded, for example, that large bonuses have little effect on the performance of bankers. He suggests that banks would be better off firing all but their most talented employees and hiring thousands of new workers with none of the salary and bonus expectations of the old ones. They would be able to do the same work for much less money, unburdened by outlandish expectations. I would love to hear Jamie Dimon and Lloyd Blankfein debate that one.

Prof Ariely argues that financial rewards are only one piece of a complex web of motivations which affect each of us differently. These include a sense of purpose, status, altruism, ego and control, all of which a clever manager should take into account. And yet how many do this in anything but the most informal way?

“I went to a lot of companies and said, ‘Let’s do studies of bonuses,’ ” he says. “One hundred per cent of the time, people would tell us that bonus season is so miserable, they didn’t want to prolong the agony by studying it any further – even though we know that productivity goes down during bonus season and that bonuses are not the most efficient motivator.”

He added that “the biggest curse in compensation are compensation consulting firms” that do nothing but benchmark compensation against companies, which may or may not be useful comparisons. “They know nothing about the science,” says Prof Ariely. “They’re just perpetuating the misery.”

It may be that companies don’t have Prof Ariely’s urgency. Managers who have survived the recession intact are probably feeling confident in their existing model. Now may not seem the time to go redrafting the rewards structure and instituting flexi-time for all.

Prof Ariely says he still receives plenty of calls from start-ups, brimming with enthusiasm for new organisational forms. They crave new ideas about compensation and how to improve employee morale and creativity. They are eager to use unconventional methods to motivate individuals who spend their days working away from the main office on unusual schedules, and may only ever see parts rather than the whole of a business.

But once these companies reach any kind of scale, the experimental mindset hardens into a procedural one. The enthusiasm to get the most out of every individual becomes a desire to settle on a one-size-fits-all motivational template, regardless of the irrational behaviours it might cause.

The only way Prof Ariely has found through this inertia is to get the chief executive on side. He began working with Scott Cook of Intuit, the financial software company, on experiments to understand the behaviour of his customers. Why, for example, do people pay down their smallest loans before those that carry the highest interest rates? He suggested creating a software tool to help customers behave more rationally.

But now he says his behavioural economics research is seeping into Intuit’s internal organisation. Instead of offering purely financial incentives for great work, Intuit now offers high-performing employees half a year’s sabbatical.

Mr Cook is also encouraging a culture of experimentation, telling employees that a failed experiment is no failure if it produces evidence. This is vital to employees’ feelings of control.

Innovative management that takes the complexity of human behaviour into account can be a competitive advantage – especially now, when so few are ready to practice it.


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