The tenth of W. Edwards Deming’s 14 points is to “eliminate slogans, exhortations, and targets for the workforce asking for zero defects and new levels of productivity. Such exhortations only create adversarial relationships, as the bulk of the causes of low quality and low productivity belong to the system and thus lie beyond the power of the work force.” In other words, incentive pay is bad.

In “The Dark Side of Incentives” (BusinessWeek, November 12, 2009), Barry Schwartz concurs: “The inescapable flaw in incentives, as 35 years of research shows, is that they get you exactly what you pay for, but it never turns out to be what you want.”

You need look no further than the incentive practices of our large banks to see the truth in these statements. Pay bonuses for short-term results without any regulator on how those results are achieved and you will get the results you want, but at what cost?

Deming reminds us that low quality and low productivity—in fact, 80-90% of all problems an organization faces—are problems with the system. Since management controls the management system, 80-90% of all problems are management problems that the workforce is not in a position to resolve.

Not only are incentives an ineffective substitute for leadership, but they also negatively affect how people make decisions. Incentives tend to remove the moral dimension from decision-making. Without a financial incentive, people consider their responsibilities to their team or department or organization. With a financial incentive, people ask what’s in it for them.

In “Why Organizations Fail,” I wrote about a speech by Dr. Russell Ackoff in which he compared corporate decisions to GE’s stated objectives over a five-year period. He found that every decision violated one or more of the objectives, while 92% of the decisions supported one objective: To maximize the wealth, security, and quality of life of the people who made the decisions.

It’s not hard to figure out how GE’s experience would be different if they removed incentive pay from the equation.

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