Condemning Commissions

Human behavior expert Alfie Kohn has published numerous works decrying reward systems. His writings include "Why Incentive Plans Cannot Work," Harvard Business Review, September-October 1993, and "For Best Results, Forget the Bonus," The New York Times, Oct. 17, 1993.He is the author of "No Contest: The Case Against Competition" (Houghton Mifflin, 1992), and "Punished By Rewards: The Trouble with

Human behavior expert Alfie Kohn has published numerous works decrying reward systems. His writings include "Why Incentive Plans Cannot Work," Harvard Business Review, September-October 1993, and "For Best Results, Forget the Bonus," The New York Times, Oct. 17, 1993.

He is the author of "No Contest: The Case Against Competition" (Houghton Mifflin, 1992), and "Punished By Rewards: The Trouble with Gold Stars, Incentive Plans, A's, Praise, and Other Bribes" (Houghton Mifflin, 1993). See www.alfiekohn.org for more information.

RR: You question the entire idea of commission compensation systems.

Kohn: Yes. That sort of carrot-and-stick routine does not get better results over the long haul. In fact, a number of studies have demonstrated that people tend to do far better work, especially on challenging and creative tasks, when there is no reward at all.

The more people are rewarded for doing something, the more they lose interest in whatever they did to get the reward. This is one of the most frequently replicated findings in [psychological research].

RR: So you feel commission-based compensation structures actually harm the motivation of brokers?

Kohn: For decades, psychologists have understood that there are different kinds of motivation. And the kind matters more than the amount.

Typically, psychologists speak of intrinsic motivation, which is a fancy term for loving what you do. On the other hand, extrinsic motivation means you do things for other reasons, such as to not fail or to make more money.

The research suggests that these are two different animals--and intrinsic motivation is better--and that they tend to vary inversely. As intrinsic motivation goes up, extrinsic motivation tends to come down.

What matters is how someone is motivated, not how much. The sad fact is, commission systems promote motivation that is not only ineffective, but also counterproductive.

RR: So you're saying brokers would actually do better if they got a salary?

Kohn: If people are trying to figure out how to game the system so they can maximize their own commissions, then they are not doing their best work. They are not as engaged with their work as they might be at a brokerage firm that, for example, put people on a generous flat salary and said: "This is the last we are going to look at money. From now on, we look at what we can do for our clients, and what we can do to help you become more delighted with your work so your clients are delighted with you."

RR: Wall Street would have a problem with that. Some brokers wouldn't work.

Kohn: If true, that is evidence of how much damage this system has done. When people try to figure out what's in it for them every 10 minutes, that is indicative of a problem with the management or compensation systems.

In some places, there is no management system because the managers let the compensation system manage for them. They abdicate responsibility for figuring out how to solve problems. In effect, they say, "I don't know why you are having problems but here is a bunch of money."

On some level, [senior managers also] understand that commissions are about controlling brokers, not about maximizing effectiveness.

RR: How would you suggest Wall Street fix the system?

Kohn: Whenever executives in any field ask me how to pay people, I say they should do three things. Pay them as well as you can afford to. Pay them fairly. And then do everything in your power to take money off of their minds. Obviously, any commission system is an inherent violation of that last precept.

You can vary how much people are paid on the basis of seniority, the number of clients they serve, their territory, the amount of specialized training they have, when they were hired or on other market factors. The one thing that should never be done is to pay people on the basis of alleged performance.

RR: But if I make no calls and bring in no business, I should get rewarded in line with somebody who's working hard?

Kohn: Again, the assumption is that some people simply loaf if their paycheck is not dependent on working. The kind of person who would take advantage of a system where all receive a salary is someone whose desire to do good work has essentially evaporated in the face of manipulative schemes like commissions.

Look at that problem this way. What if Broker A is full of energy, has no family, and has lots of time to find new clients. Broker B has less time but is very skillful at talking with people and convincing them to sign on. Broker C isn't so good with the cold call but is very good at keeping clients happy by checking in with them on a regular basis.

The most rational system is one in which those brokers work together instead of requiring each of them to do everything. The commission system is irrational because it discourages cooperation. If I'm able to do what I'm best at and what I like best, I don't have to be treated like a pet.

RR: Well, you at least agree with the industry's desire to see brokers working in teams.

Kohn: An enormous pile of evidence suggests that people do their best work when they can cooperate effectively, coordinate their efforts with others and share what they know with colleagues. If we are in a system where helping you hurts me, we have the opposite of cooperation. We have poisonous competition.

I did a research project on that topic resulting in a book called "No Contest: The Case Against Competition." The evidence showed that when people are turned into rivals, their psychological health, the quality of their relationships and the quality of their work tend to suffer.

RR: That's interesting because Wall Street still uses various forms of sales contests. Some in management swear these things work.

Kohn: Evidence suggests that the alleged benefits of sales contests are vastly overstated. The more innovative thinking a task requires, the less likely it is that people will be successful at it if they are doing it to increase their commission or win an award. The more you consider long-term effects, the more you realize that what seems to work in the short run is often counterproductive.

RR: Brokers are forming teams and putting commission revenue into a pool that's shared by the partners. Is that better?

Kohn: It's still a problem if you are tinkering with the same behaviorist motivation [of money rewards] instead of getting to the bigger issue of what motivates people.

RR: In reality, most brokers don't pay much attention to contests or payout plans. They don't understand them.

Kohn: Ironically that may be the saving grace. If the system is so complex that people can't understand it and ignore it, that limits the harm it can do. When people do understand the system and come to work every morning thinking about their commissions, the quality of their work is likely to suffer, not to mention their mental health.

But your comment raises the question, why are these reward systems so persuasive?

RR: And answer is ...

Kohn: The answer is, such systems are preferred by top executives who value their own power over subordinates more than they value the quality of work that is done.

RR: So how would you manage a Wall Street firm?

Kohn: If I managed a brokerage house, my tendency would be to pay people an acceptable salary and then bring them in on deciding the best way to expand the business. What techniques have not worked? How can we learn from one another? What direction do we want to take this whole business? For most folks, that is far more motivating than simply chasing more bucks in a highly controlled environment where somebody else makes the important decisions.

Studies for at least a half-century show that when people are asked to rank the qualities of their jobs that matter, money is well down the list after such features as good people to work with and the chance to do creative and varied work.

And of course, in a broader sphere of life, we have hobbies, passions and avocations we pour time and energy into. How about children? There you'll see a net loss. (Laughs.)

The point is that most reasonably healthy people take the greatest satisfaction from things for which they will not be compensated. I'm not saying that money does not matter. But I am saying that its role and especially its motivational properties are widely misunderstood.

RR: There's a trend toward fee-based compensation in the brokerage business. Will that solve the problem?

Kohn: It could eliminate a powerful pervasive incentive that is really not to the benefit of the client. It helps to neutralize the effect of the reward to the broker. It does not go as far as we might go in neutralizing the whole commission system. But it seems to try to address many harmful effects of commissions.

RR: Thanks, Alfie.

TAGS: Archive
Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish