The first time I received a Christmas bonus, I was elated. I expected it the next year. That’s human nature. But it’s more than that. It’s the nature of financial incentives to morph motivation. That’s a challenge for companies with a purpose beyond profitability and personal gain. But it’s not insurmountable. My favorite auto shop has reframed financial remuneration. It’s why so many cars are serviced there.

A company with a purpose beyond profitability understands the difference between purpose and mission. Mission is tactical—what a company does, such as providing goods and making a profit. Starbuck’s is selling coffee. Purpose is transcendent—why a company exists, such as “restoring business” or “do no evil.” Starbuck’s is experiencing “the third place.” Companies need both. The challenge in Corporate America is getting colleagues to take purpose seriously. Financial incentives undermine this effort. It’s their nature.

“Study after study has shown that intrinsic interest in a task—the sense that something is worth doing for its own sake—typically declines when someone is given an external reason for doing it,” Alfie Kohn notes. Kohn is the author of several books, including Punished by Rewards. He cites findings from research indicating financial incentives—bonuses, commissions, and options—undercut workers’ motivation to take a company’s purpose seriously. They pull people toward mission and profits and away from purpose.

Kohn notes there is not a single controlled study that “has shown a long-term improvement in the quality of work as a result of any reward system.” In fact, scores of studies conducted in real workplaces have demonstrated how rewards tend to be powerfully counterproductive. When a manufacturing firm took Kohn’s idea seriously, the incentive system that had been in place for years was removed. It was expected that the welders’ production would slump with the incentives off the table, since it is assumed that financial incentives motivate. This did happen at first. But then their production rose and eventually reached a level as high as or higher than before. Why?

We are wired to work for a higher purpose. In a study conducted by Edward Deci, 90 participants were told to press a computer key every time a dot appeared on the screen. The researchers admitted it was a boring task but told the first group it would be useful for others. A second group was told the task “will be for your own good.” The third group was only given instructions without explanation. The first group did the task better than the other two because it was framed as having a higher purpose.

Colleagues can figure out what really matters in a business. When they hear corporate leadership say: “At the end of that day, we gotta make money,” it becomes clear that the bottom line is profits, not purpose. “At the end of the day” is another way of saying what matters most in this company. But there’s another way to see what most matters.

Jack Welch said there is a defining moment that determines whether a company takes it’s purpose seriously. Welch was the Chairman and CEO of GE from 1981 to 2001. He said every company has colleagues who don’t embrace the purpose and aren’t hitting the numbers. They’re not in the right work. Others do embrace the purpose but aren’t hitting the numbers. Help them. Others embrace the purpose and are hitting the numbers. That’s a no-brainer. But here’s the defining moment: What does a company do when a colleague doesn’t embrace the purpose but is hitting the numbers?

The reality is that, in most cases, high earners who only pay lip service to the company’s purpose keep their job. Others then look around and notice that the colleague wasn’t fired even though they aren’t serious about the company culture. “Ah… I see. That’s what matters here.” This is not to say workers aren’t worthy of their wages. The problem is the nature of financial incentives—they morph motivation toward profits over purpose. This, in turn, yields larger occupational differentials in earnings, affecting even more public-spirited pursuits such as the Rhodes Scholarships.

Two weeks ago, 32 young Americans were awarded Rhodes Scholarships. For more than a century Rhodes scholars overwhelmingly chose paths in scholarship, teaching, writing, medicine, science, law, the military and public service. Business attracted relatively few (three out of 320 scholars in the 1970s). In the 1980s, however, the pattern of career choices began to change. Rhodes scholars headed to Wall Street.

According to Elliot Gerson, American secretary of the Rhodes Trust and executive vice president of the Aspen Institute, this “break in an almost century-old pattern coincided with great increases in occupational earnings differentials, which have continued to grow, seemingly exponentially.”1 In the 1970s, the differentials in earnings between business leaders and doctors or lawyers were generally two- to fivefold. Between business leaders and professors, scientists and public servants, the differentials in earnings were five- to tenfold. Today, they have become a hundredfold or far more.

The Rhodes Trust has never suggested that business was an unfit profession. But even “for a few of those most deeply committed to other, more public-spirited pursuits, the lure of such rewards, especially as they are reasonably attainable for people of such high abilities, became much harder to resist,” Gerson concludes. The problem isn’t that incentives don’t work—it’s that they work too well, for good or evil. After Sarbanes-Oxley, paying CEOs with options has proven to motivate their behavior—they cheat more. Paying teachers according to test scores does work—too many teach to the test and cheat students. PricewaterhouseCoopers has conducted a biennial survey of economic crime for the past ten years. Based on over 3,000 responses from firms in 54 countries, they found a “worrying” link between cases of fraud and financial incentives. In firms linking more than half of pay to performance, 36 percent reported frauds, compared with just 20 percent of firms that use no incentives.

You can’t change the nature of financial incentives. But companies can change the system for how colleagues are compensated. In my little town, there is an auto repair shop that the locals trust. I asked the owner for the secret of his success. Andy said it was removing financial incentives and paying his mechanics a salary. There is no longer any incentive to rush repairs or recommend unnecessary ones. Mechanics are paid to do good work, which is essentially the company’s purpose. Andy understands the nature of financial incentives. And, by the way, his shop has been very profitable for over 20 years.

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1 Elliot Gerson, “From Oxford to Wall Street, Washington Post, November 21, 2009.

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13 Responses to “The Best Little Auto Shop in Maryland”

  1. Tim Patterson says:

    Very interesting, Mike. I’ll be pondering these things so more.

  2. George Hepburn says:

    Purpose trumps over Mission. But Mission leads to fulfilling Purpose since without the Mission accomplished, the pupose has no energy behind it.
    At some point, having the individual think of their next fitting( in Dynasplint’s case) as having helped the person as opposed to that fitting representing the next level bonus is what we want the mindset to be.

    Our comp plans do not necessarily reflect that posture but in the end, it is hard to imagine the more productive Sales Consultants not making the most money.

    I think it is like a war. The people on the front line ( sales ) just have to do what they’re told. The generals have to see to it that the war ends when the purpose is fulfilled and that every battle that the foot soldiers enter is in line with the purpose of why they are fighting the war in the first place. So in the end, it doesn’t matter if the soldiers buy into the purpose as long as they follow the commands of the upper crust, who better be mindful of the purpose. Otherwise the war takes on no meaning and will end in a disaster.

  3. John Taylor says:

    We’ve wrestled for years with how to reward our plumbers without inadvertently incenting them to cheat our customers. We never came up with a good way. After reading this, maybe I’ll just stop trying.

  4. Larry Taylor says:

    Great piece, Mike! It explains why our US economy is in the shape it is. We’ve already seen the banking industry ‘shoe’ drop as a result of mission trumping purpose vis à vis sub-prime lending. And the next shoe to drop will undoubtedly be an enormous number of companies going under because of a similar phenomenon with business buy-outs over the past few years. When banks and other lending institutions lost the handle on purpose and what ‘ought’ to be, purposed morphed into mission and the number one question became, “What’s in it for me?” rather than, “What’s best for the communities we serve?”

    I’m reminded of your November 23 article titled, “Repacking the Bearings.” In part, it was about pain and its importance to health. Just like the welders whose production initially fell after they felt some ‘pain’ when incentives were removed, yet later rebounded; there will likely be more economic pain before our economy becomes healthy again…assuming we can learn from our past mistakes. Here’s hoping we will!

    To George’s comment, I’d like to say that foot soldiers are not drones. It is clear from Civil War letters written by soldiers on both sides that they not only understood the purpose for which they were fighting, but they also embraced it. The generals could have only reinforced what was a shared purpose to begin with.

    The problem(s) that brought us to the worst recession since the great depression happened because every man was doing what was right in his own eyes, having lost a shared purpose for the way things ‘ought’ to be. Generals may be able to tell the foot soldiers when the purpose has been fulfilled, but if the foot soldiers have no other purpose than their own, purpose will quickly morph into mission as Mike has illustrated so well. Wish I lived closer to your auto repair shop, Mike!

  5. Ray Saunders says:

    1. How about the name of the repair shop?

    2. I think it is an over-generalization to say financial incentives are bad – how about rewarding something that doesn’t closely match the organization’s purpose is bad? The welders, the mechanics at your auto shop, they have a proper incentive – do the best work you can, and you get to keep working here. They know that the pride they take in doing their jobs well is respected and valued by their company, and presumably want to continue to work there.

  6. David Greusel says:

    Very interesting and provocative piece, Mike. Thanks for making my head hurt. I’m wondering if some work (picking up the garbage, say) requires extrinsic rewards because it’s kind of hard to see the higher purpose?
    I also wonder if a distinction should be made (perhaps in a longer article) between financial rewards that are socialized (i.e., everybody in the company gets an extra $500 because we had a good year) versus rewards that accrue to individuals (sales bonus, stock options). It seems to me that it is the latter that tend to be counterproductive. In some organizations, competition for bonuses can lead to people sabotaging co-workers or withholding information to pump up their own performance, in direct opposition to the organization’s purpose.

  7. MH says:

    Most incentive programs do not properly align the individual’s goals with the firm’s goals. So the worker does whatever they can do to get the reward, even if getting the reward doesn’t contribute to company success. Basically: gaming the system.

    The NBA comes to mind where the richest players are the ones who promote themselves the most, take the most shots, etc. Often these behaviors don’t contribute to the team success, but they bring a big payoff to the individual. What is the answer? If I had those skills, I would do the same thing!

    “If you love your job, you never work a day in your life,” sounds like what you are saying in your examples. I feel like these are just anecdotes, can we really generalize those principles? Can everyone love their job, and be satisfied without financial incentives? Are all managers good enough motivators to not need the financial incentive?

  8. Marc Horton says:

    When I started work at a large company I would have done the work for free (not really!) because it was so rewarding. The big purpose was to provide medicines for a healthier world, and the immediate purpose of my work was help defend the company from lawsuits. Later, the company became embroiled in organizational churn, adapting to “globalization,” endless reorganizations, and skillfully articulated “purpose” rang hollow in the face of the ruthless pursuit of profits. Morale hit bottom, and only declining economic conditions kept remaining people at their jobs.

    Personal fulfillment and meaningful purpose were shown to be far greater motivators. Annual incentives were positive in that they were tangible recognition, but negative for most, who were not in sales, and only received a pitance.

  9. John Seel says:

    I fly a great deal, often as much as 20 days a month. I’ve become partial to jetBlue. I consider them the W Hotel of air travel. The other day I shared my enthusiasm for the airline with a jetBlue ticket agent as I was checking in. To my surprise, she wouldn’t accept the compliment. “I don’t think we’re any different from Northwest Airline,” she said. “Where I worked for most of my career.” Northwest is the airline that has created a marketing nightmare for Delta, it’s new owner, when two of its pilots overshot their runway. What was apparent was that the person most in contact with the customer, in this case the ticket agent, was not aligned to the jetBlue’s purpose. It takes more than the generals to be committed to purpose. In the end, it is the foot soldier’s commitment that makes that lasting difference.

  10. Brad McDonald says:

    I train businesses in their sales, business development, and management practices. People often ask me if I can just come into their business and motivate their people. They say they are not interested in long term training; “I just need you to motivate these folks….” I have always maintained that nobody can really motivate anybody else, at least not in the long term, to perform at a higher level, that must come from within. Now I know why!
    I talk about external motivation – positive (the carrot) and negative (the stick). Neither works well in the long term. In the case of the carrot – once the need is met and the subject is “full” the desire to strive for the carrot goes away until hunger sets in again. In the case of the stick – most people won’t hang out very long when they’re subect to beatings and if they do then they eventually become numb to the pain and revert to their old ways.
    The best motivation I’ve found comes from setting realistic goals that have a purpose beyond myself. E.g. I want to make $500K next year because I can use a lot of that money to support a mission in Mexico, a place where I’ve seen lives changed for the better for 25 years now. The WHAT is the $500K and the WHY behind it is to make great things happen for a group of people who need some help in life to get educated and become self sufficient. When I see 3 folks who 15 years ago lived out of a city dump in Mexico and now they are an accountant, a nurse, and an auto mechanic and they’re lives are productive and they have self worth and a sense of purpose – THAT MOTIVATES ME!
    So, I agree with you, Mike, but also think that money is a great motivator for me, as long as it is a means to greater things.
    Thanks,
    Brad McDonald

  11. George Hepburn says:

    Great dialogue.

    I agree that the very best way to get a company restoring people , business and life the way it ought to be ( which is Dynasplint’s purpose ) is to get the entire work force to be aligned with its purpose. At Dynasplint, we spend all the time we possible beleive we have to get everyone lined up to our purpose. But the reality is, that when you have 700 people in a business that has been around for 28 years , there will be mixed attitudes and other drivers to what each person responds to.
    The key influencers must constantly engage the rest of the work force in ways to get them to see the virtue in fulfilling the purpose. All incentives ought to be aligned to encouraging conversion to having a mindset that helps fulfills the company’s purpose. Those incentives include selling the business’s products and services to only those who can benefit from them and providing them the way they ought to be done.

    But without measurement, you will have a miserable ” job” ( I hate that word) . And measurement lends itself to reward, which has to lead to bonuses for more work . If you raise the salary for more work it is the same thing—just disguised . Otherwise it’s unions and communism—everybody gets the same money no matter what you do . That fails.

    The key is what is at the heart of the person. If the foot soldiers ( sales people) are primarily interested in money, then that sets them on a path to destruction, much like the business failings our cheaters in the economic collapse we have just felt. But if the foot soldiers, either follow the commands given from the generals( who only command through the eyes of the purpose) or have the purpose engrained in their hearts, then the mistakes made driven by greed and avarice will result far less often . But to not pay more to those who are the most productive will fail just the same. Money ought to follow more productive individuals but that productivity has to top be in a manner that lines up with the purpose of the company, hopefully through the changed hearts of the foot soldiers after all the time spent on them just following orders and then seeing the greater purpose of their mission.Try to get them to see the purpose first, but if they do not, then make sure they follow orders well.

  12. Hank says:

    “From each, according to his ability; to each, according to his need”

    One’s performance in the military, whether a “foot soldier” or a general is tied to longevity and promotion, not performance.

    Some argue that promotion is tied to performance – it is really tied back to longevity, plus conformity, & risk aversion.

    Indeed a higher purposes motivates many in the military service but this is muddled by a system that discourages creativity and initiative.

    The general is more likely the practiced conformist – the “foot soldier” more often a purposeful risk taker.

    Tying compensation to performance does not exclude serving a higher purpose & vice versa. A combination of both would be optimum.

  13. Hank says:

    Correction: 2nd Paragraph: “One’s compensation in the military, whether a “foot soldier” or a general is tied to longevity and promotion, not performance”.

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