Internal Consistency - Stop Rating Performance. Start Recognizing Performance!

When you perform at your best, what is most likely to make you want to do it again?

McKinsey conducted a study in 2009 on financial and nonfinancial incentives; specifically looking at how effective they are and how frequently those incentives were used. Which were most/least effective? Which were most frequently used?

Here is the source article if you would like to go the article. I’ve taken the data presented in the article and created some visuals to help understand the impact of financial incentives and nonfinancial incentives.

This first graph is a scatterplot showing where each incentive is scored regarding its effectiveness (Horizontal axis) and how frequently it is used (Vertical Axis).

Here are the real data from the McKinsey study:

What can be gleaned from this visual? Good question!

1. Overall, nonfinancial incentives are more effective than financial incentives.
2. Praise from immediate manager is the most effective incentive followed by Attention from leaders and Opportunities to lead projects. People will give you their best if they feel appreciated.
3. Performance-based bonuses are the most used incentives.  This notion is the previous generation’s motivation model. “If you do well, we will give you money”.
4. The second most effective incentive is also the second to last frequently used incentive. Attention from leaders is highly effective and highly overlooked.
5. Increase in base pay is a very common incentive, yet falls far behind other incentives regarding effectiveness.

What does this say about how organizations operate? They are taking the easy way out. It’s like giving someone a gift card for their birthday, Christmas, etc instead of a thoughtful gift.

If the scatterplot doesn’t help show that nonfinancial incentives are underused, here is the same data presented differently. This shows the gap between the effectiveness score and the frequency score. This means that the bars that extend to the right are underutilized and the bars that extend to the left are overutilized.

Again, this is the same data, but only presented differently. What probably stands out is the bar associated with Attention from leaders. There is a 20+ point gap between what people want and what people get.

Let’s take these results and create an ROI study.

An example employee is paid $25 an hour.  Their immediate manager is paid $37.50 an hour and next level leader is paid $50 hour. This employee has successfully completed a project with a difficult client and it hasn’t been an easy task.

The manager could give a bonus equivalent to 2% the employee’s base salary of $50,000. That bonus totals $1000. And the manager decides to give 3% raise in base pay totaling $1500. Together that’s an additional $2500! What is the likelihood of the bonus and increase pay to influence that employee’s behavior for the next project? Is he/she likely to go ‘above and beyond’ for another bonus and raise?

Or

The manager gives the employee meaningful recognition for his successful completion of the project and offers a leading role in a different project. Also, the manager shares this with the next level leader and that leader takes the employee out to lunch. What is the likelihood of the recognition, leading a project, and attention to influence that employee’s behavior for the next project? Is he/she likely to go ‘above and beyond’ for more recognition and attention?

Since this is an example ROI study, let’s compare the costs, impact, and returns.

Note: This is not rigorous and would not recommend following this calculation in other ROI studies. This is an example of making ground level assumptions and using the data that are available.

So what does this mean?

Nonfinancial incentives cost the company  time and consideration instead of dollars. The incentive is a thoughtful gift rather than a gift card. And when people receive a thoughtful gift, that consideration is appreciated. And organizations are giving gift cards 68% of the time and giving thoughtful gifts only 40% of the time.

After performing well, which would you rather receive?