Volume IV: Rewards and Incentive Programs

It’s that time of year again. I’m not talking about Christmas, Chanukah, Kwanza, or <insert your personal holdiay here>. It’s getting towards the end of the year, and it’s typically around this time, that companies start doling out bonuses of one sort or another. I’ve been giving some thought to this, as my own personal bonus is something I still need to decide on. Moon River Software can certainly afford to give me nearly any bonus that I desire, but there are a few lingering questions in my mind about this. Many questions in fact.

Will giving me a bonus make me work harder? Will I be grateful for that bonus? If I had a dozen employees working for me, would I give out bonuses to all of them, some of them, or none of them? On one hand, a nice bonus at the end of the year is a little something to tell your employees how much you appreciate all of their hard work. You appreciate their contributions to the company, and those late nights they’ve spent making sure that the products you make are perfect and well tested.

So how do you roll up all of those “thank you’s” into a gift? It turns out to be far more difficult than you might think. You see, there’s something about the corporate reward system that strikes me as odd. For the most part, it applies to end of the year performance reviews as well. In my eyes, performance metrics are pretty worthless. Lines of code, bugs opened, bugs fixed, customers called, calls fielded, money spent taking clients to dinner, etc.

I used to run a game called Cry of the Ancients. It was a simple, web browser based game that at its height, had around 400 players or so. I learned some valuable lessons running that game that are very applicable to any type of reward system. Any time that I added a new feature to the game, I had to be extremely careful to think about the consequences of that action. Once given a new tool or an option, it is very difficult to remove it without causing an incredible uproar.

I learned this when I decided to add assassins to the game. In the original version of the game, there were Generals that you could train, and use for various things in the game. Basically, they accomplished a number of tasks, and each had attributes which helped him to accomplish that task better. As players used their generals, they became increasingly better and better at their tasks. This eventually resulted in huge power swings that could literally topple the mightiest player within a few hours. So, I introduced assassins to help get rid of some of these ‘Uber-generals’. It didn’t quite go as I had planned.

It turned out that instead of solving the problem, I had made it worse. Originally, players with these Uber-generals would attempt to topple one another and that was generally the end of it. By allowing players to purchase assassins to kill these generals, players started creating multiple accounts to buy these assassins and then use them to topple their enemies anonymously. So, I limited the number of assassins that any one player could have to only 5. Players created still more accounts to house these assassins.

Eventually, I grew tired of the back-and-forth game I had entered into and decided to simply no longer allow assassins in the game. Fortunately, since assassins were not a renewable resource and could only be used once, I was able to simply let the game run its course. Not many people realized that new assassins were not entering the scene until it was much too late. By then, most of them had been used, and the few that were left were somewhat inconsequential.

Similar situations arose when I wanted to implement a reward based system for getting more people signed up for the game. I had wanted to get a few thousand people playing, and knew that only through the help of the players could that be achieved. Even before I implemented anything, I could quickly see that rewarding players for helping to attract new players wasn’t going to work out very well. To reward a player for attracting new members to the community, you need to measure their contribution. And in measuring that contribution, you open up the doors to abuse that reward system.

The reward itself needs to be significant enough to entice people to make an effort. It also needs to be low enough that it doesn’t create imbalances in the game. Giving additional gold for each new player you attract would create an army of fake accounts, each drawn by current players who are getting bonuses for doing nothing more than creating fake email accounts. The entire game was such that even small changes could make a world of difference in how the game played.

And this is the inherent problem with reward systems. How do you reward someone for doing a good job on something that they should be doing anyway? If they do a poor job, should they be rewarded? If you say yes, then you are reinforcing their poor performance. If you do not reward them, then you further alienate the person, who will be upset when he or she may think that they are doing a good job. When you implement a system where additional incentives are given for specific performance metrics, the people in question will do things to meet those metrics, regardless of the surrounding variables.

Many corporate executives are given this very incentive, typically via stock options. The value of these stock options is often so incredibly high that it overshadows their salaries. For the sake of someone to pick on, take a look at Microsoft. Bill Gates is listed on Yahoo! Finance as having a salary of $1 million per year. He currently has over $40 billion in assets, the vast majority due to the stock options he was granted when he started the company. Indeed, looking at any number of publicly traded companies will show you that corporate executives hiring packages and bonuses far outstrip their salaries.

In addition, their sole performance metric is quarter over quarter growth of the company, both in terms of dollars generated and profit per employee. It is these same executives who decide that cutting 100% health coverage to 80% will save the company a bundle because the employees will bear that other 20%. All so Bill Lumbergh’s stock can go up a quarter of a point.

I have personally seen people run projects over budget, cutting into company profits in order to meet their personal performance metrics. It would be a crime for an employee to write himself a check for $25,000 but it’s perfectly acceptable to run a project $100k over budget just to meet another deadline on a checklist that results in a $5k bonus for the employee instead of a $2500 bonus. Is something missing from this equation? Are companies really this dumb?

It would appear so. The scandals of Enron, Adelphia, and many others have shown that people are willing to do incredible things to the companies they are supposed to be helping to the best of their abilities in order to achieve some measure of personal gain. And why is this? Because they have been giving performance metrics to meet, and if they don’t meet them, bad things happen.

These examples merely show that when nobody is looking, incentive based plans don’t work because people look for ways to actively meet their objectives easier, thus manipulating the system. One of the reasons you implement an incentive based system is because you simply don’t have the time or resources to stand over people telling them exactly what to do every minute of the day. This is entirely self defeating.

But lets come back to my own personal dilemna. Will a bonus really make me work harder? Probably not. In fact, I know that it won’t, just as the lack of a bonus won’t make me work any less hard. I work for Moon River Software because I want to. I work long hours, I work very nearly every single day. I don’t recall the last time I went more than 24 hours without turning on my computer and working on something, or using my notebook to jot down business ideas. I have been doing this for nearly 2 months now with no compensation other than my salary, which started only this past weekend.

Should I get a bonus every week that I work more than 40 hours? The company could certainly justify it, and as company doing consulting for the time being, those extra hours are certainly benefitting the company monetarily. I keep returning to the very same idea though. Giving myself a bonus will not make me work harder, and the lack of one will not be detrimental to my work. Why is this?

I’ve come to the conclusion that it’s for a number of different reasons, all of which are rolled up into a single concept.

I’m happy here.

It turns out, that most people hate their jobs. The reasons generally tend to vary widely, but they seem to revolve around inept managers, insensitive policy decisions, and a lack of recognition for individual accomplishments. There’s a common theme here, which is lack of communication, between employees and the company. The remedies for this vary, but I’ve got my own set of rules that you can follow to help ensure that your employees stick around for as long as you want them to.

1) Set clear goals for the company and make sure the employees know what they are. This sounds simple enough, and many managers do a half assed job here. I’m sure all of the executives know what the company goals are, since they were likely in the meetings that these goals were set. But does anyone else know? Are they published somewhere? Does everyone else have access to the whiteboard where they are listed?

Chances are, probably not. By keeping the company goals in plain view for everyone to see, employees will have a fair idea of what needs to be done to achieve those goals. Even if they’re not certain what needs to be done, most people are smart enough to see the need for the things that they are doing. Why am I stuffing envelopes again? Oh yea, it’s because we’re trying to hit $1 million in sales by the end of the year, and these envelopes are going to all the CFO’s of the Fortune 1000 companies. If I don’t stuff these envelopes and send them, the CFO’s won’t see them, and our company won’t make its goal.

People need to be able to appreciate the significance of their actions. Understanding why their job is important is key to this appreciation. Without it, people start to slack off because their work is somehow devalued. Eventually, this leads to unsatisfied employees who leave the company for better opportunities, typically those whose responsibilities do not include stuffing envelopes.

2) Set clear goals for the employee with the employee. The key here is really the second piece. Sitting down with the employee is very important because it helps keep them involved in their own career development. Simply telling an engineer that you want them to learn the latest .NET stuff so they can assist with an upcoming project just isn’t good enough. In fact, it’s incredibly naive. Does the person even want to continue being an engineer? If not, then you’ve got a problem. If you have an open communication line with your employees, then finding out they’d like to do QA instead of Support, or Support instead of Engineering is really a blessing in disguise.

It means that your employees can look inside the company for new opportunities, rather than outside of it. You will certainly run into cases where the goals of an employee are not in line with those of the company, as was the case in my previous job. I wanted to run my own software company, and they wanted me to continue doing development for them. These seem to be mutually exclusive operations, but we found that they were not. Since then, I’ve been doing some contract work for them here and there. I get to run my own company, and they get my engineering talents. It’s a win-win situation.

By sitting down with employees on a regular basis, you can gain valuable feedback about their career paths, what goals they want to achieve, and what is important to them. I’ll give you a hint. It’s not always money. Personally, I took a 5% pay cut to work for Moon River Software. But I can still pay my bills, Moon River Software is still in business, and I am master of my own destiny, which suits me just fine.

3) Let people own their projects. People like to own things, even if they’re not even real. There are hundreds of thousands of people out there who are buying and selling virtual property all the time. Want to buy a sword in Everquest? What about World of Warcraft? Even most software is licensed, not sold. Ideas and project responsibilities are no different.

Early in my career, I worked for a company called Clearwire Technologies in Buffalo, NY. I ended up there mainly because someone I knew turned down a co-op there and I needed a job. He referred me, I had a phone interview and was hired shortly thereafter. Within a few short months, I was learning all sorts of things about embedded systems, multi-threading, wireless routers, and software engineering. It was great. I got involved with the IT department there, and eventually my boss ran out of things for me to do.

He told me he’d have something for me to do in a few days, and in the meantime, he wanted me to pick something that I wanted to learn more about and read up on it. He didn’t care what it was. So, I started learning CGI programming using HTML and perl. Within a couple of months, I was writing the online order entry software for the company. Eventually, I was in charge of nearly every aspect of the project, from working with the sales team, the network team, clients, member ISP’s, etc. I was even flown to Dallas one week to give a presentation on the software to the CEO, CFO, and all of the VP’s. It was exhillerating to know that so much rested on my shoulders.

Eventually, people started to get scared. They were putting a lot of faith in me. Too much in fact they thought. Was my software really going to manage all of their operations? I was too young to be in charge of something so important, and there was a lot of VC money riding on the company. So, they brought in some consultants who had offered them customizeable software which would manage their company. The meeting started, and these two men started their presentation. Forty-five minutes into the presentation, the CEO starts pressuring them for pricing. They backpedaled a bit, trying to ease into it, but the CEO cornered them and asked “How much” three times in the space of 5 seconds.

$20 million, plus customizations. Needless to say, the meeting ended abruptly within the next 5 minutes as the entire executive team cleared the room, leaving me, my boss, and the two salesman. I was very happy with the way things ended, but I wasn’t particularly thrilled that the meeting had taken place to begin with. I owned that project. It was my baby. I poured my heart and soul into it, doing everything possible to make everyone happy. All because it was my project.

Let people own their projects. They will work harder all on their own, and amazingly enough, they’ll be happy to do it.

4) Maintain an open door policy. Make this known, and frequently reinforce this. Employee happiness should be your number one priority. I’ve worked at a number of different places over the years, and I think that the one that I felt the most comfortable talking to my boss about anything was at Clearwire. Perhaps it was because I was much younger then. I didn’t know nearly as much about software as I do now, and I thought I knew more about software than I do now. Apparently I was brilliant in my youth. I’m not sure what happened.

It turns out that talking to an employer about your employment satisfaction isn’t very easy to do. There are a number of reasons for this, but there’s one that sticks out the most in my mind the most. “Will it really make any difference?” Well, it depends on where you work. At Moon River Software, I’d like to think so. Making your employees happy should be your number one priority, for this very reason.

It’s more expensive to replace someone than it is to ask “What can we do to make your work more enjoyable?” and then go ahead and do it. Good people cost a lot of money to replace. And once they’re gone, you’re probably not going to get them back. Even if you hire them back as a contractor, they’re likely going to make more money than it would have cost to make the necessary changes to convince them to stick around in the first place.

At MRS, I decided a while ago that eating was important enough that the company should pay for it. I’ve worked at two different companies which provided free meals for the employees. You can’t imagine how much of an incentive that is for people. I know people who have stuck around for the free lunches alone. At the moment, money is still a little bit tight, so it’s mostly microwave meals, snacks, free beverages, and a number of other things. But it’s so worth the investment, and the cost is minimal. In the past 4 weeks, I think I’ve spent under $100. Over the course of a year, an additional $1,200 in expenses for food is minimal compared to salary, software, hardware, etc. In fact, I spent nearly $1,500 on the Wise Installer. The expense of free lunch for a year is less than the cost of a single software license. Not bad. Not bad at all.

5) Let your employees help make important decisions. It’s important to note that when you’re a manager or the owner of a company, you need to get feedback from your employees when decisions are going to be made which affect them. Cuts to benefits can be a huge problem. As I mentioned earlier, once you have given a benefit of any kind, it’s notoriously difficult to take it away. I like to think of this rule as being the opposite of the Open Door Policy. While the open door policy is about letting the employees know that they can come to you with their problems and concerns, you should also have the reverse policy where you can go to your employees with your problems.

Lets use my previously made up example and say that we have two companies who are suffering from low income and need to start cutting benefits to help make ends meet. We have “Employees Suck Up Our Profit, Inc.” and “Our Employees Rock, Inc.”.

“Employees Suck Up Our Profit, Inc.” has decided that laying off people is going to be worse than anything, so instead, they’re going to cut employee benefits to help keep people around. The executives make the decision, tell their employees that the decision has been made, they’re affected, and hopefully things will change.

“Our Employees Rock, Inc.” handles things a bit differently. The executives realize that they are not going to be able to meet the demands of payroll, benefits, and all the other expenses, and cutting the company health plan is probably the best way to keep costs down, without laying people off. So, they call a company meeting and explain that the company is in some financial trouble. They need to save money in every way possible, and this is the most likely way to keep the company in business. But if people are willing to work some extra hours, and help meet a few more of the company goals, it is likely that things will turn around and the health plan can remain intact.

Whose plan do you think is going to go over better? Where would you want to work?

Now I understand that depending on the size of the company, you simply can’t always do this. But calling a company meeting and telling people in advance that things are headed downhill and the consequences of not meeting the company goals is going to result in the loss of health benefits is a far better plan. It allows for options, and people appreciate being in the loop when things in the company are happening. I don’t think I could ever work in a publicly traded company because I feel so blind to what’s going on.

How is sales doing? What customers are looking at our products? How are people using it? What can we do to help land deal XYZ?

In a publicly traded company, unless you’re in management, you’re pretty much in the dark, due to insider trading laws. And that sucks. I’m the type of person who hates to fly because I’m not in control of the plane and I can’t see where I’m going. At least if I can see where I’m going, I can offer suggestions and be on the lookout for trouble. But if you don’t tell anyone that you’re in trouble, they can’t help you until it’s 12:01am on the day after the due date. Then it’s too late and there’s nothing anybody can do.

So, now that I’ve ranted long enough on this topic, it’s important to recap just a bit and say that the biggest incentive and biggest reward you can give someone is a great place to work. One where your employees don’t hate dragging themselves out of bed in the morning. I loved working at Clearwire. It was one of the best places I ever worked, because I felt like I was making a huge contribution to the company, and I was responsible for an important project.

Make your employees feel important, and they’ll be happy to work for you. Once you’ve accomplished that, any bonuses/rewards that are offered will be just a bonus for doing their best, which they will do regularly because they enjoy it. If your employees are looking forward to the bonus as something which is supposed to make them stick around, then chances are that you’re going to be posting on Monster.com sooner rather than later.