Why I’m Contrary on Compensation

When I was a teenager, I spent two summers working in a furniture manufacturing factory. The company, Steelcase, was (and still is) one of the largest office furniture manufacturers in the world. I worked in the binder-bin plant – a binder-bin is the cabinet that mounts on the back of your desk at about eye-level. I assembled the damn things. It was physically demanding (binder bins are heavy) and repetitive work. There was absolutely nothing intrinsically rewarding about the work; suffice to say, I did not enjoy it.

I was well paid though. I received a base wage rate plus a piece-rate, where I was paid an additional amount for each binder bin that I completed. The piece-rate was set based on meticulous analysis of the manufacturing process which determined how many units I should be able to produce per hour. The full-time factory workers, who were lovingly referred to as “factory rats”, were paid under the same scheme. This scheme was intended to motivate higher output on the manufacturing line.

A couple of weeks into my first summer, I figured out that I could improve my output of binder bins, and therefore my compensation, with a couple of tweaks in the process.  During lunch, I shared with some of the factory rats what I had discovered. Their response was not what I expected. Essentially, I was told:

You don’t get it. If you improve the process, management will modify the piece-rate component of our comp scheme. We’ll have to make more units to get the same total compensation. You’ll only be here for the summer, but we’ll have to live with that change forever. Don’t do it. Don’t ruin it for us.

The factory rats didn’t want to help the Company figure out how to produce more, because they didn’t believe they would receive more compensation for identifying ways to produce more. This was my first experience with what compensation experts call “if-then” rewards. I have been skeptical of “if-then” compensation schemes ever since. If this kind of pay for performance scheme doesn’t work for a mundane repetitive task, imagine what happens when you apply “if-then” rewards to knowledge work.

Established management philosophy treats all employees like the factory rats – with carrots and sticks. That philosophy says “I can cause you to do more of what I want you to do if I pay you when you do it” and “If you don’t do what I want, I will withhold rewards or worse punish you”. This is tantamount to giving a mouse a piece of food for pushing the blue button and shocking it if you push the red one.  The only problem is we’re not mice (or rats for that matter). WE’RE HUMAN and that makes us complicated. Carrots and sticks don’t work.

The first book I read on this topic (many years ago now) was Edwards Deming’s The New Economics. Yes, that Deming, the American-borne manufacturing process guru who helped to usher in Japanese domination of manufacturing process. It turns out that Deming was also a management psychologist who was well ahead of his time. Deming believed that we should abolish performance reviews in the workplace and grades in school. He felt that those types of subjective measurements of performance wiped out the employee’s/student’s intrinsic motivation. The employee’s goal becomes to please management, rather than to do good work. The student’s motivation becomes to get a good grade, as opposed to learn. It turns out that we complicated humans like to do good work and we enjoy learning; we are intrinsically motivated beings; external rewards and punishments get in the way.

Many years later, I’m encouraged that there is finally a new management regime beginning to take hold. It is best summarized in my most recent reading on this topic. Written by Daniel Pink, Drive: The Surprising Truth About What Motivates Us gives a good overview of the roots of our antiquated management/compensation philosophy and the science (much of which has been around for many years) that shows how flawed it is. Pink also offers insight into what we can do to change. To sum it up; pay people what they are worth, give them autonomy in their work, provide them the opportunity to master their craft and create a sense of purpose in the workplace. It is not that hard.

My own experiences, my personal reaction to comp. schemes I’ve had imposed on me in the past and years of reading on this topic (Here are my favorites) make me contrary on compensation. I’m done with carrots and sticks. How about you?

Note: For a good summary of Drive, check out this RSA Animate sketch narrated by Pink.

Derek Pilling is a Managing Director at Meritage Funds, a growth equity firm. Derek invests in technology-enabled services businesses in the Internet Infrastructure, Cloud Computing, Digital Media and SaaS sectors.Derek lives in Denver with his wife and his three children. In his spare time, Derek enjoys coaching youth soccer, skiing, hiking, spinning and hopping on his rowing machine in the morning.

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  • http://gundy.org Gabriel Gunderson

    It’s so obvious when you read it. The part about school and grades couldn’t be *more* true.

    BTW, I enjoyed the bit about factory rats. We all start somewhere :) Where I worked, they were called “critters”. Heh.

    • http://www.derekpilling.com Derek Pilling

      Having read a bunch on the topic, I’m convinced that the only thing grades measure is test-taking performance. They certainly do not measure the time and effort a student spends learning – this is what we should measure and reward!

Derek Pilling

About Derek

I'm a Managing Director with Meritage Funds, a growth equity investment firm based in Denver, CO. I've been working with growth stage businesses my entire career. When I'm not working, I ski, spin, coach youth sports and spend time with my beautiful wife and three kids.

I blog because the process helps me crystalize how I frame the world. I want to hear what you think. Please comment.

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