Thursday, June 18, 2009

Allocating rewards in co-operative environments

At Cogent Consulting we compensate people in two ways - we have healthy base salaries and we offer profit share that is not linked to performance or to salary. It's close to equal shares (there are some details that mean that's not true overall). We debated this arrangement when we created Cogent and I've discussed it with colleagues back as far as 2001, but it's based on our gut feel of what would minimise conflict and maximise co-operation. It avoids the debate about relative performance that bonus systems create, that are normally circumvented by secrecy (secrecy isn't an option at Cogent). So it was interesting to read this in No Contest: The Case Against Competition by Alfie Kohn:

"In recent years, Deutsch and his associates have investigated not only the way tasks are set up but the way rewards are distributed. Among the possibilities are a winner-take-all system (which is what many contests amount to), a distribution proportional to accomplishment, and an equal distribution. Much as we tend to assume that competing boosts performance, so it if often taken for granted that the first two arrangements provide a crucial incentive for working hard: reserving a desirable reward for the winner is thought to promote excellence. A series of six experiments with Columbia University students, involving tasks that ranged from decoding Japanese poetry to estimating the number of jellybeans in a jar, was devised to test this assumption. The results: When tasks could be performed independently - that is, when there was low means interdependence - the system of distributing rewards had no effect on how good a job they did. There was absolutely no evidence to suggest that people work more productively when rewards are tied to performance than when everyone gets the same reward. But for those tasks where success depends on working together, there was a clear difference. A system of equal rewards, Deutsch discovered, "gives the best results and the competitive winner-take-all system gives the poorest results".

Notice that this is also a profit-sharing scheme, not a bonus system tied to some particular behaviours. We hope that our behaviours are driven by our principles, and that long-term this will generate profits. We wouldn't want people to change their behaviours to maximise single year's profit. If we ever detected that we'd need to review the profit-sharing scheme.

1 comment:

  1. I've always wondered if the classic small-law firm model would work with IT shops. You know - newcomers start as "associates" and get paid a salary (possibly with bonuses), but the ultimate goal is to get recognised as a partner, in which case you shift to profit sharing.

    The associate-level allows the firm to recruit new talent at a fixed risk; the partner-level allows for the co-operative mode. As long as the ratio of partner-associate is good (the case in small law firms, not large) the competition between associates isn't likely to be unhealthy - particular if the promotion to partner is merit based rather than "we've got 1 slot open this year".