In terms of salary and pay, base pay is how companies determine an individual’s base salary. This is an integration of internal equity (based on job evaluation) and external equity (based on market data). The second issue in pay is variable pay. One type of variable pay is incentive pay. According to the Bureau of Labor Statistics, incentive and supplemental pay for private companies surveyed averaged 2.9 percent of the total compensation package of employees.7 As employees move up the organizational chart, the proportion of variable pay should increase—along with their amount of control over job tasks. Many organizations have incentive-based pay plans based on individual performance. Because the focus of this book is on teams, we focus on team-based pay. When teams are an organization’s choice approach to job design, it often makes little sense for the organization to use systems that reward individual performance. Manufacturers of Detroit’s Big Three auto companies shifted back to paying performance bonuses to auto assembly workers. Car manufacturing is built around teams, and when the team works well, more units are produced in less time for less money.8 However, performance appraisal systems for individuals that require a fixed number of positive and negative rations or provide fixed pots of budget money to be divided within a group are destructive because they put team members in competition for rewards.9 The cutthroat cooperation effect refers to the fact that it is more difficult for teams to move from competitive to cooperative reward structures than vice versa.10 Indeed, teams with a history of competitive reward structures performed worse than teams with a history of cooperative reward structures.11 Incentive systems combine individual performance and team performance to reflect the degree to which a job calls for individual work and teamwork. For example, a bonus pool may be created based on the performance of the entire team. The bonus pool can be divided among the individuals who are members of the team based on how well the individuals performed. For example, at Pret A Manger, bonuses at the restaurants are based on the performance of the entire team and not on individuals.12 New hires are sent to a store for a 6-hour day, and employees vote on whether or not to keep them. When employees are promoted or pass a training milestone, they receive a cash bonus, known as a “shooting star,” which must be passed on to co-workers who have helped them learn and grow within their job. The annual employee turnover rate is around 60 percent, whereas the typical fast-food industry rate is between 300 and 400 percent.

To ensure that team members do not compete in a destructive fashion, a 360-degree feedback method can be used (the method is discussed in detail in the next section). Another alternative is to have two reward systems operating in tandem. One system provides bonuses to teams based on their performance; the second rewards individuals, based on how well they have performed. These systems can be based on separate budgets so that they do not compete. Hybrid rewards lead to higher levels of team performance than do individual and shared rewards.13 The reason why hybrid rewards are more effective is due to improvements in information allocation and reductions in social loafing (free riding).

A critical question is whether to reward behavior or to reward results. Traditional thinking may lead managers to link team performance to their results. For goals such as cost reduction, this is easy to quantify, but for other areas it is much more difficult. One solution is to redefine or broaden the meaning of success, much as the previous chapter reviewed the four measures of team productivity (productivity, cohesion, learning, and integration). Thus, many managers reward competencies rather than results—for example, does the person participate? Does the person empower others? Does the person listen in a team environment? The Calgon brand gives an annual award for the best idea that doesn’t work and presents it with a commemorative cup at an annual awards dinner, stimulating innovation and positive behavior and not “winning.”14 At advertising agency Grey New York, a “Heroic Failure” award is handed out to employees who take big risks. One award was given to a senior vice president who needed to create a memorable impression with six executives representing a kitty litter product. Before the meeting she buried her cat’s waste in a box of the company’s litter and pushed it under the conference table. No one smelled or suspected a thing until she pointed it out during the meeting, to shock and then laughs all around the table.15

Although team incentives offer significant advantages, there are some potential drawbacks. Incentives may create unintended behavior. For example, when Ken O’Brien was an NFL quarterback, he threw a lot of interceptions, and one team attorney wrote a clause into O’Brien’s contract penalizing him for each one he threw.16 The incentive plan worked: O’Brien’s interceptions plummeted, but he also stopped throwing the ball! The use of team-based rewards may create the potential for motivational loss (i.e., social loafing and free riding). This may result from perceptions of inequity when other team members are perceived as free riders, but rewards are nevertheless allocated based on equality. Moreover, team rewards may not foster cooperation in teams.17 Team rewards may foster competition between teams, leading to suboptimization of the organizational goals.18

The power of positive recognition often is severely underestimated. Making sure that employees are happy and feel they are appreciated builds loyalty and productivity. Leaders should not approach this passively. Furthermore, in companies with team environments where people’s identities are incorporated into teams, employees may feel a greater need for recognition.19 It can cost virtually nothing—just a little time, energy, and forethought. The CEO of The Studer Group sends a handwritten birthday card and a $75 gift card to employees, as well as a note and a $25 gift card to each employee’s child on their birthday. In addition, individual efforts are also recognized with handwritten notes from the CEO.20 Recognition, rewards, spot cash awards, or “celebrations of success” reward contributions after the fact, when performance is known. With regard to fairness, people view it as less fair to distribute resources equally when the resource is a medium of exchange (i.e., cash and tokens) rather than a good that holds value (tickets, plaque, etc.).21

The idea behind team recognition is that money is not everything. There are infinite sources of nonmonetary recognition—plaques, trophies, small gifts, vacations, and dinners with company officers. The most important feature of any of these is to give the gift respectfully, personally, and sincerely. First and foremost, this means that people and teams are singled out—if everyone gets the same recognition, it doesn’t work. Bob Nelson, author of 1501 Ways to Reward Employees and 1001 Ways to Energize Employees, notes that recognitions such as “employee of the month programs” don’t work because, eventually, everyone is going to receive the award.22 The reward should be chosen with the people in mind. Not everyone likes sporting events or ballet, for example. It is important to clearly tie the recognition to team performance; it will lose its effect if the organization waits 2 months to reward the team. (For some general guidelines for implementing recognition awards, consult Exhibit 3-3.)

Many companies use profit sharing schemes, wherein a portion of the bottom-line economic profits is given to employees. These internally distributed profits may be apportioned according to equality or equity. In the typical profit sharing plan, profit sharing bonuses are put into retirement plans. This makes it more difficult to clearly relate rewards to controllable performance. Thus, most profit sharing plans have little impact on the motivation and behavior of employees.28

Profit sharing plans serve an important communication purpose by signaling to everyone that rewards are in balance across the organization. Second, they inform and educate employees about the financial health of the organization. Finally, profit sharing makes the labor costs of an organization variable, thus adjusting them to the organization’s ability to pay.29

Gainsharing involves a measurement of productivity, combined with the calculation of a bonus, designed to offer employees a mutual share of any increases in total organizational productivity. In gainsharing plans, an organization uses a formula to share financial gains with all employees in a single plant or location. The organization establishes a historical base period of performance and uses this to determine whether gains in performance have occurred. Typically, only controllable costs are measured for the purpose of computing gain. Unless a major change takes place in the company’s products or technology, the historical base stays the same during the entire history of the plan. Thus, the organization’s performance is always compared with the time period before it started the gainsharing plan. When the organization’s performance is better than it was in the base period, the plan funds a bonus pool. When its performance falls short, no bonus pool is created; when performance is met or exceeded, the typical plan pays about half of the bonus pool to employees and the rest is kept by the company. Payments are usually made on a monthly basis, with all employees receiving the same percentage of their regular base pay.

Gainsharing enhances coordination and information sharing among teams, instigates attitude change, raises performance standards, and enhances idea generation and flexibility. Gainsharing plans are more than just pay incentive plans; they are a way of managing and a technology for organizational development.30 For gainsharing to work successfully, it should be developed in collaboration with the people it will affect. It is important that employees understand the formula and how to influence it, that the standards seem credible, that bonuses be timely, and that some mechanism exists for change. A company needs a participative management system, because the plan requires employees to take ownership of the success of the company.31

Profit sharing plans are typically less effective than gainsharing plans in influencing employee motivation and changing culture than are gainsharing plans.32 This lack of effectiveness is largely attributable to the disconnection between individual performance and corporate profits—even with high-level involvement. This depends on how salient profit sharing benefits are made to the workers. Consider the company that boldly posts its stock value for all employees to view in public areas—people see the value literally.

These four systems for rewarding employees—incentive pay, recognition, profit sharing, and gainsharing—should not be viewed as competing approaches, but rather as compatible systems that accomplish different, important objectives. For example, the combination of gainsharing and profit sharing deals directly with an organization’s need to have variable labor costs and helps to educate the workforce about financial information.

A change in traditional performance appraisals, precipitated by the rise of teams, concerns what is measured in performance reviews. In many traditional control-oriented organizations, the major determinant of employees’ pay is the type of work they do or their seniority. The major alternative is competency-based pay. Companies are increasingly recognizing that dynamic factors, such as competencies and skills, may be a better way to measure success than static measures, such as experience and education. Next, we review job-based pay, skill-based pay, and competency-based pay.

The standard is the employee’s supervisor or some set of top-level persons. With the increasing use of teams, peer review is becoming more common and more necessary in organizations. Popularly known as 360-degree or multirater feedback , the peer review procedure involves getting feedback about an employee from all sides: top (supervisors), bottom (subordinates), coworkers, suppliers, and end-user customers or clients (see Exhibit 3-6). Typically, several people (ideally 5 to 10) participate in the evaluation, compared with a traditional review in which only one person, usually a supervisor, provides feedback. SkillSurvey Inc. developed a program that applies the 360-degree performance review concept to employee recruitment. For example, in their employment search for nurses, each reference provided by the nurse applicants was sent an email asking them to anonymously complete a survey about their former coworker. The performance review results were combined and considered during the hiring process.39 In a 360-degree program, the highest paid should be the highest ranked when the results are plotted on a graph. Anonymity is the key to building a nonbiased feedback system, especially for peers and subordinates. Otherwise, the entire system is compromised.

A big disadvantage of the top–down performance review is evaluation bias. The multiple data points and aggregate responses provided by 360-degree feedback make the bias of a single person less of a problem. A second major disadvantage of single-source evaluation is that it is easy to dismiss the information. Reginald Bull, Chief Human Resource officer of LG Electronics, decided to reveal the facts of his own 360-degree evaluation to ease integration into two Korean companies. On his first day on the job, he displayed summary scores from his most recent 360-degree review, which ranked him “average” for the operational phase of projects because “once the factories turn on, I get bored.”40

In theory, the 360-degree process provides a multifaceted view of the team member. However, putting it into practice can be difficult: If the number of feedback sources is limited, raters are not guaranteed anonymity and may fear retaliation. The system is subject to abuse if members make side deals to rate one another favorably. However, despite its difficulties, 360-degree or multirater feedback is usually regarded to be a more fair assessment of performance than is top–down review. Although team members are often best qualified to rate one another, there are some weaknesses to this approach. Team members unpopular for reasons other than performance can suffer. Team members do not always grasp the big picture in terms of organizational goals. As raters, peers can suffer from evaluation biases.

It is impossible to develop a 360-degree evaluation program overnight. Most teams are not ready to base all of their pay on multisource performance management, especially when teams are relatively new. Most teams are hesitant to have all of their pay tied to team member evaluations; at the same time, they scoff at individual pay performance systems. The key is to set up a system of feedback that is anonymous and private and slowly build into an open feedback, public knowledge system.

There is no standard method for 360-degree implementation. Some companies administer and develop the whole system. Some allow outside consultants to prepare and analyze feedback to ensure anonymity. To develop a 360-degree evaluation system, consider the steps outlined in Exhibit 3-7.41

The practices put into place to address the issues in Exhibit 3-7 will be different for every organization. Duplicating systems used by world-class companies is not necessarily the best approach. Each organization should develop the 360-degree system that will optimize effectiveness within its organizational design. Companies should first use a pilot 360-degree program that is not tied to compensation and that is not public. In the beginning stages, only the employee sees all of the feedback; gradually, the supervisor is brought into the loop. Eventually, it is important to tie employee compensation to the 360-degree evaluation.

As companies begin to challenge old assumptions about performance appraisals, they need to be careful not to cross the line of legal liability (see Exhibit 3-8). If people other than management are involved in the appraisal process, then they must be trained on the legal issues involved with discrimination law, the Americans with Disabilities Act, and other relevant legislation. Whereas the use of multiple raters has become more popular as many firms move toward team-based management systems, gender and race affect performance reviews, with evaluations more positive for underlings whose managers share their social demographic. Ingrained expectations, about what types of people perform better, also subtly influence the process.42 For a detailed look at actual items used in 360-degree evaluations, consult Appendix 4.

Wageman, Hackman, and Lehman developed a team diagnostic survey (TDS) to identify conditions that increase the likelihood that teams will perform well. The TDS can be used on a 360-degree or peer-feedback format. It assesses the effectiveness of team task processes, the quality of members’ work relationships, and team members’ motivation and satisfaction. The TDS is organized into eight parts: (1) boundaries, interdependency, and stability of the team; (2) purpose of the team; (3) size, effectiveness, diversity, skills, decision autonomy, behavior, and brand image of the team; (4) overall satisfaction with rewards for team performance, access to task necessary information, technical advice, training, and material resources; (5) effectiveness and coaching abilities of their team leader as well the support/feedback from other members; (6) team

commitment, innovation , and knowledge sharing; (7) personal satisfaction with team relationships; and (8) learning opportunities and sense of well-being fostered by team membership.43

Candid performance evaluation and feedback are essential for team members because they allow people to adjust their behavior and motivation and to seek training.45 However, raters frequently positively distort performance ratings when they anticipate giving feedback to ratees.46 Inflation stems from two sources: empathic buffering and fear of conflict. People are generally reluctant to transmit bad news to a poorly performing employee.47 And, when doing so, they feel bad themselves.48 A second reason is that raters want to avoid interpersonal conflict, particularly with someone they expect to respond defensively to criticism.49

Most managers believe that employees are primarily motivated by extrinsic incentives (e.g., job security and pay) and less motivated by intrinsic incentives (e.g., learning new things). For example, Douglas McGregor explicitly acknowledged this tendency when he described a social fault line between managers who inferred motivations incorrectly and those who inferred them correctly.50 He bemoaned the commonness of Theory X managers (who believe that employees dislike work, wish to avoid responsibility, and desire security above all) and the scarcity of Theory Y managers (who believe that employees like work, wish to develop their skills, and desire to participate in tasks that advance worthy organizational goals). Consider a survey of 486 prospective lawyers who were questioned by Kaplan Educational Centers during a preparation course for the Law School Admissions Test. The prospective lawyers were asked to describe their own motivations for pursuing a legal career and then those of their peers. Although 64 percent said that they were pursuing a legal career because it was intellectually appealing or because they had always been interested in the law, only 12 percent thought this about their peers. Instead, 62 percent thought that their peers were pursuing a legal career because of the financial rewards. Indeed, most of us have claimed that “they’re only in it for the money” many more times than we have claimed “I’m only in it for the money.”51

The extrinsic incentives bias states that people believe that others are more motivated than themselves by situational or extrinsic factors and less motivated than themselves by dispositional or intrinsic factors.52 For example, in one survey, 74 MBA students ranked the importance of eight motivations (benefits, pay, job security, learning new skills, praise from manager, developing skills, accomplishing something worthwhile, and feeling good about oneself) for themselves and predicted the rank order that would be provided by their classmates and by actual managers and employees.53 The MBA students overestimated how highly Citibank managers would rank extrinsic incentives. They predicted that the top four incentives would be primarily extrinsic (pay, security, benefits, and praise); however, the actual Citibank employees listed only one extrinsic incentive in their top four (benefits). Another survey of 235 managers identified only two goals—increased sales and more customer referrals—that were thought to be influenced by cash incentives. Numerous other goals, such as better customer satisfaction, improving teamwork, and employee retention, were believed to be better achieved with noncash awards.54

If managers falsely assume that others’ motives are less noble than their own, then they may fail to communicate the importance and relevance of the organization’s goals.55 Corporate managers may spend too little time highlighting the satisfaction of solving customer problems; nonprofit managers may spend more time describing the joys of charity balls than the pleasures of community service. When managers fall prey to the extrinsic incentives bias, they may overlook the importance of feedback, neglect opportunities to make jobs more interesting, and underestimate the employee’s desire to participate in team and organizational decisions. Managers could substantially improve their ability to understand the motivations of others if they assume that others are motivated exactly as they are.56

People work hard for a lot of reasons. People often care more about the fairness of procedures they are subjected to than the material outcomes these procedures yield;57 they often care more about a group’s collective outcomes than about their personal outcomes;58 and their attitudes toward public policies are often shaped more by values and ideologies than by the impact they have on material well-being.59 For these reasons, it is a mistake to think that the only thing that drives performance is monetary incentives and that people hoard effort until incentives justify greater contributions. Many managers incorrectly believe that people are primarily motivated by monetary reward. However, they view themselves as having loftier reasons. For example, most people overestimate the impact that financial reward exerts on their peers’ willingness to donate blood.60

Generally, appraisers rate appraisees who are similar to themselves more favorably than those who are different from them. This means that, in general, white male superiors tend to favor white male subordinates over females and minority supervisees.61

Once we know one positive (or negative) fact about someone, we tend to perceive other information we learn about that person in line with our initial perceptions. This has several serious implications, the most obvious of which is the fact that physically attractive people are evaluated more positively than are less attractive people—even when holding constant their skills and competencies.

We tend to perceive people’s behaviors as reflecting their personality rather than temporary, situational factors. This can obviously be a good thing for someone who seems to be doing well, but it can be problematic for a person who seems to be performing below expectations.

Performance appraisers give poor performers substantially higher ratings when they have to give face-to-face feedback as opposed to anonymous written feedback. In one investigation, managers were asked to give feedback to a poorly performing employee, either in a face-to-face mode or via tape-recorded message.62 In all cases, the objective information about the poorly performing employee was identical. However, managers using direct, face-to-face communication gave more positive performance feedback than managers who used the indirect mode (the tape recorder).

Experienced appraisers tend to render higher-quality appraisals, and training and practice can reduce error in ratings.63

People feel a strong social obligation to return favors. Thus, a potential flaw of 360-degree programs is that they are subject to collusion: “I’ll give you a good rating if you give me one.” Providing for anonymous rating may reduce collusion. However, this is difficult to achieve when team size is relatively small.

People want to “jump on the bandwagon,” meaning that they will want to hold the same opinion of someone as does the rest of the group. In one investigation, people with organizational supervisory experience made an initial performance judgment about a profiled employee.64 These leaders then received additional information that was discrepant from their initial judgment (either positive or negative) from one of two sources (the profiled employee himself or one of his peers). Leaders were more likely to use discrepant information to alter their performance judgments in a consistent direction when the source was a peer (but not the profiled employee).

People tend to be overly affected by their first impression of someone (primacy) or their most recent interaction with this person (recency).

Conflicts of interest can lead experts to give biased and corrupt advice.65 Whereas simple disclosure of the conflict of interest by the rater is often suggested as a solution, people generally fail to discount advice from biased advisors. Moreover, the advisor who discloses a conflict of interest then feels morally licensed and strategically encouraged to exaggerate the advice even further. In one investigation, people making estimates of the value of a jar of coins were allowed to listen to “advisors.” Advisors who disclosed their initial biases gave advice that was more distorted.66

There is no simple solution to overcoming these biases. Awareness is an important first step. We suggest that everyone in the business of providing performance evaluations be made aware of these biases. Employees in companies probably do receive some form of training on conducting performance appraisals, but hardly anyone receives training on the biases that afflict ratings. As a second step, we suggest that only objective behavior and productivity measures be used—they are less susceptible to biases than are traits and attitudes. A rule of thumb: If you can’t observe it directly, then don’t measure it.

Most people feel underrecognized for the work they do and the value they bring to their company. In short, people give themselves greater credit than do others. This means that in a typical 360-degree evaluation, no matter how positive it may be, people will feel underappreciated by others. The supervisor (or person providing the feedback) should present as many facts as possible to justify the ratings and feedback. It is important to focus on behaviors rather than attitudes when assessing others, because it is more difficult to misinterpret objective information (e.g., “you’ve been late 18 out of the last 20 days”). Undoing egocentric biases in groups can backfire. For example, team members who contribute a lot are less satisfied and less interested in future collaborations when they are instructed to consider others’ contributions.67

As we noted earlier, people are strongly motivated by intrinsic interest, rather than by extrinsic rewards. However, this is not to say that people don’t care about extrinsic rewards. Furthermore, this does not mean that intrinsic interest will always flourish. In fact, even positive feedback, if not carefully administered, may undermine intrinsic interest.68 That is, employees may do something for purely intrinsic reasons, such as the joy of learning new things or expressing themselves; however, if a supervisor or a person of obvious importance praises the work and administers large extrinsic rewards for the work, this may lead the employees to believe that they are doing the work for the money (or other extrinsic rewards). In some cases, external reward may undermine intrinsic interest. For example, incentive or pay-for-performance systems tend to make people less enthusiastic about their work.69 And, massive bonuses actually cause employees to perform worse. Specifically, in one investigation, people were asked to perform various tasks involving memory, attention, concentration, and creativity.70 One-third were promised a small bonus if they did well (1 day’s pay), one-third were promised a medium bonus (2 weeks’ pay), and one-third were promised a very high bonus (5 months’ pay). The group offered the highest bonus did worse in every single task because they were focused on their bonus, rather than the actual work.71

We are not suggesting that companies should never offer extrinsic rewards to their employees. Rather, the manager should emphasize, when providing the reward, what is valued about the work and how the company views the employee. When high effort is rewarded, people are more industrious. Just as people can be reinforced for working hard, they can be reinforced for creativity.72 Thus, a supervisor or company may give the team a special cash reward or noncash recognition and clearly communicate to the team that the company values their inspiring motivation, creativity, and attention to detail.

Ideally, raters’ evaluations should be objective and based on defined standards. However, teams and leaders often make comparative rather than absolute performance judgments.73 This is why students feel less value in receiving an A if they find out that everyone has received an A. Thus, supervisors must anticipate that team members will talk and compare notes, one way or another, about the feedback they receive. It is often these comparisons that drive how employees interpret feedback. One study examined how a rater’s relative performance affects their ratings of peers.74 Self-evaluations were higher than ratings given to the self by one’s peers, and high performers were the most likely to be discriminating. Below-average and average contributors tended to make external attributions for their low performance.75 In teams that have less cooperative goals, when low performers compare themselves to high performers, they are more likely to harm that person, but only when expectations are low that their future performance will be similar to that high performer.76

Supervisors should be frank about feedback to employees and team members. For example, it would be wrong to imply that an employee was the only stellar performer if, in fact, over 60 percent performed at the same level. (For this reason, it may be useful to provide information about averages and standard deviations to employees.)

People evaluate the quality of their organizational experiences by how fair they regard them to be. For example, CEOs use their own power to increase their salaries as well as those of their subordinates.77 Moreover, salaries of CEOs serve as a key referent for employees in determining whether their own situation is “fair” and influences their reactions to their own compensation, including how long they will stay at the organization. Non-CEO top management team members receive higher pay when they work for a high-status CEO.78 However, “star” CEOs retain most of the compensation benefits for themselves.

In general, people not only care about their outcomes (i.e., how much they are getting), they also care about how they are treated—that is, procedural fairness. People are more likely to accept the outcome if they think the procedure has been fair. The fairness of procedures is determined by the extent to which the employee has a voice in the system.79 Supervisors should actively involve the employee in the performance review, because people who are invited to participate regard procedures and systems to be fairer than those who are not invited. When people are uncertain about their standing as organizational members, their overall work attitudes and behaviors may become more disconnected. For example, employees who feel their outcomes are low may believe procedures are fair.80 Superiors may ask employees to anticipate the feedback they will receive and to suggest how to best act upon it.

People often undervalue advice they get from others.81 However, how much people actually use the advice they receive depends on the difficulty of the task. People overvalue advice when they perform difficult tasks and underweight advice on easy tasks.82 This is true regardless of whether advice is automatically provided or deliberately sought. People often fall victim to a curse of knowledge effect, such that once they receive advice or information, they find it difficult or impossible to take the perspective of someone who does not have that information.83 In a team environment, this means that people who know the answer to problems find it difficult to take the perspective of someone who does not have that information. Furthermore, people’s judgments of fairness are also affected by counterfactual thinking—that is, thinking about what might have been. For example, when an outcome that is considered unfair originates from a person who is knowledgeable, the person is held accountable for any actions or decisions they did or did not make with their knowledge that could have prevented the unfair outcome. When a person is viewed as an expert, and is assumed to have a broader knowledge of the harmful outcomes of a particular decision, they are held more responsible for bad outcomes in a given situation than when a person is not an expert and is not as knowledgeable of all potential risk scenarios.84

Although there is no surefire way to eliminate the biases on the part of the ratee, awareness of the bias is key. A second step is to recognize that many ratee biases are driven by a need to maintain or enhance self-esteem. Put evaluations in a positive light and help employees view them as opportunities to grow, rather than as marks of failure. A third step is to involve employees actively in the evaluation procedure before they receive their results. For this reason, an early planning meeting, months ahead of the evaluation, can be an ideal opportunity for teams and leaders to identify and clarify goals. Finally, recognize that performance appraisals, in any form, tend to be stressful for all involved. However, they provide an opportunity for everyone to gain feedback about what otherwise might be an “undiscussable problem.” Tools such as 360-degree evaluations have the power to break down the barriers of fear in the organization. However, this can be effective only if managers are trained and skilled at using the information to break down barriers instead of building new ones.

Compensation won’t motivate employees unless there is a direct line of sight between performance and results. For example, when incentives are tied only to the final profit of a company or group, which can be affected by all sorts of market forces, the connection between performance and reward is weakened. At the same time, pay should bear some kind of relationship to the company’s bottom line. If the company is in the red, team rewards appear nonsensical—unless management is confident that ultimately the team’s superior productivity and quality will help turn the company around.86

In effective programs, rewards are contingent upon performance. This is in perfect contrast to a Las Vegas slot machine, in which payouts are contingent upon luck. Furthermore, a system that always pays out is ineffective. The key is to devise a system that equitably spreads the risk between the team and the company, offers a potential gain that makes the risk worth taking, and gives employees a fair shot at making more by working harder, more intelligently, and in a more coordinated fashion.

For many teams, a thoughtful balance of individual and group incentives may be most appropriate. A good rule of thumb is to balance this proportion in line with the amount of individual and team-based work an employee is expected to do or the percentage of control and responsibility the individual and the team have. It is also important to consider whether feedback should be at the individual or group level. This is because it is possible that an individual might be performing well but his or her group is not, or vice versa. The extent to which a person is identified with their team is critical when individual and group feedback is discrepant. For example, when a person receives negative feedback, but their group’s feedback is positive, those who are highly identified with their team are less discouraged than those who are less identified with their team.87

The process by which an organization introduces a program is more important than the program itself. The programs with the greatest likelihood of success are those that have input from all levels of the organization, including members of the team, teams that support or interface with the team, those who will administer the plan, management, and customers. The feasibility of the team pay program is determined through a full understanding of the business, the wants and needs of the management and employees, the impact of the current compensation program, and the company’s ambitions for the new plan.

If people remain ignorant or uninformed about a process, they are more likely to reject it out of hand when they see it—even if it is perfectly compatible with their interests. In short, people want to be involved. The team members who are affected will have greater buy-in to the program if they had a hand in shaping it, and they can be valuable sources of information. In addition, employees need to feel that nothing is set in stone—if something does not work, employees will feel better knowing it can be changed.

Many programs fail not because they are inherently flawed, but rather because they create problems with other teams, groups, and units within the organization. Managers often are myopic about their own team issues; good leaders are able to ask the question of how the particular team compensation system fits into the larger organization. This is the heart of what we referred to in Chapter 2 as “integration.” Another aspect of organizational myopia is the extent to which people are future focused. Indeed, people who have future-oriented work expectations have greater job satisfaction and lower turnover intentions.88

Every member of the team should be eligible for the plan, and the plan should indicate when someone becomes eligible or loses eligibility. (Another complication concerns full- and part-time membership.)

There are two basic variations: same dollar amount (wherein each team or each member is given the same amount of pay) and same percentage amount (wherein each team or each member is given the same percentage of pay).

There are two main ways to measure team results: financial and operational. Financial measures tend to be “bigger,” encompassing profit and loss (measured either companywide or in terms of the teams’ contribution) or revenues. Operational measures are typically productivity based (e.g., cycle time). There are several drawbacks to financial measures that primarily stem from the inability of team members to control the corporate-level decisions that will affect their microfinances. Operational measures are more firmly within the team’s grasp.

Goals can be based on either past performance or projected performance. There are advantages and disadvantages to each. The most immediate advantage of the historical approach is that people can readily accept it. However, many managers like to set stretch goals. One popular compromise is raising the bar, in which the baseline is increased and employees are given a one-time payment to compensate them for lost incentive opportunity. However, there is likely to be conflict over the amount of the payout. The rolling average method sets the baseline against which performance is measured as an average of some relevant period of time. (For a detailed discussion of payment options, see Gross).89

All plans should pay for themselves, with the exception of safety plans. This means that the improvements must be quantifiable.

Shorter measurement periods and faster payouts motivate employees more and—particularly when pay is at risk—are fairer. However, the disadvantages with a short-turnaround system include administrative overhead and manipulation of results.

As stated earlier in the chapter, it is important for companies to be completely straightforward about what counts and how things are going. Indeed, people invest more resources on tasks on which they receive high-quality feedback.90 In terms of feedback quality, two things are important: timing and specificity.

As teaming becomes more developed and the organization experiences shifts in culture or focus, a new mix of rewards needs to be defined to keep the organization in alignment.