In his study of over 8,000 businesses, Nicholas Bloom of Stanford University found three things to be essential for good management: targets, incentives, and monitoring.
Of those three, I think incentive is the least understood. Targets your company certainly must set — that’s evident with little explanation. And the way you monitor and measure your progress matters now more than ever, because you have (or at least should have) access to immediate web analytics for many customer contact channels.
Incentive is tricky. On the surface, it can appear simple: We give you money, so do the work. But anyone with a reasonable understanding of human beings knows that attitude cannot produce the best return on investment in terms of innovation, happiness or stakeholder value.
A strictly financial incentive worked well in the “shareholder value” era, but in the agile era something more than financial incentive is required.
Correlation vs. Cause
Having feathers is correlated with being able to fly, but having feathers does not cause flight. A structure that creates lift causes flight.
In business, the correlations substitute for the causes of profitability and economic gain all the time, especially when confusing incentive with motivation. Creating incentive is something management can do easily. It is correlated with being successful. Big salaries, stock options, a new Cadillac, a set of steak knives, etc.
Creating motivation, however, is not something management can do easily, but it is something much more valuable. Few in management understand how incentives work. Fewer understand motivation.
In 1976 Michael Jensen and William Meckling published their study of incentives, also called agency theory, in “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”.
Jensen and Meckling’s work helped to usher in the “shareholder value era” by aligning the interests of executives (the “agency” of management) with shareholders (the “principles” of management). This has been the dominant practice since the 1980s.
Agency theory is the same as giving your kids a dollar for every A on their report card.
They may get straight A’s, but straight A’s may or may not correspond to useful learning and innovation skills.
This is a Sign of the Times
Straight A’s can’t hurt, you might say. But the agile age contains an underlying understanding that all our straight A’s aren’t producing as many innovative problem solving skills as we’d like them to.
We believe more in the gifted, motivated drop out—the Bill Gates, Steve Jobs, Mark Zuckerbergs—much more than any college transcripts.
Motivation is More than Agency
In his Two-Factor theory, or “motivation theory,” Frederick Herzberg says incentives are not the same as motivations. Motivation means people do what they want to do in their work, where incentive means people do what management wants—a.k.a. pays—them to do.
Who do you think gathers steam while producing an innovative energy of their own? Motivated people. Who do you think fades away due to higher and higher demands with less and less return? Incentivized people.
Those are the two extremes in the two factors. And of course, in practice, it’s a mixture of incentive and motivation, but everyone wins if your company’s management system is driven 100% by motivation, and pretty much everyone loses—especially stakeholders, and eventually, stockholders, if not the executives themselves—when you have a management system that’s driven 100% by incentives.
Agile, with its need for innovation and its roots in voluntary networking outside the traditional hierarchy, prefers the motivated to the incentivized wherever it can choose.
Satisfaction and the Opposite
Motivation doesn’t really come from incentive. Incentives might be correlated with motivation, but they are not causal. And just like motivation and incentive, satisfaction and dissatisfaction are separate, independent measures.
You can both love and hate something.
You can be both satisfied and dissatisfied.
You can be both motivated and incentivized.
These things are not opposites of each other. Satisfaction is not the opposite of dissatisfaction; lack of dissatisfaction is. Lack of motivation is not the opposite of having incentives; lack of motivation is.
If incentives don’t cause motivation, where does motivation come from?
Herzberg says dissatisfaction comes from what what he called “hygiene factors”:
While satisfaction comes from “motivation factors”:
Although having more and greater hygiene factors can lead to a lack of dissatisfaction, those same factors are usually hopeless in attaining satisfaction. Satisfaction comes from motivational factors, and lack of dissatisfaction is not the same thing.
Switching From Deliberate To Emergent: Replacing Agency Theory
In badly-managed businesses, misaligned incentives and bad strategies pervade. To cope, workers at badly managed firms who would otherwise be highly self-motivated switch to a kind of short-term strategy where they do whatever’s incentivized, while remaining open to new opportunities based on their real motivations—usually outside of their current firm.
Agile firms seek to hire those highly self-motivated workers who can help produce innovative ideas when they emerge, while hierarchical firms hire workers driven by incentives in a deliberate fashion.
As Clayton Christensen says in “How Will You Measure Your Life?”, it’s when we find work that can satisfy both our hygiene factors and motivational factors that we instinctively switch from an emergent strategy to a deliberate strategy. We switch from biding our time and testing the waters for new opportunities, to charging after the good thing we found.
Agile people operate like this, when our driver and our elephant both want the same thing. Don’t you think it’s time agile companies operate on the same emergent/deliberate switching, too?