Schokker pays bonuses to his 45 staff but doesn’t do so according to a set numerical formula.
Talio relies on good customer service to prosper, and Schokker believes there are so many elements to this that can’t be quantified and are best measured subjectively.
“That subjective way of looking at it is very much the philosophy I apply. As much as the guys might have somewhat loose KPIs, overall they know what the business is working towards and what it’s hoping to achieve,” he says.
Above and beyond
Incentive schemes can be effective in driving some workplace behaviours, but explicitly tying a bonus to a set of KPIs will have workers striving to achieve those particular outcomes.
But many roles are more complex and a quantifiable list of behavioural measures won’t capture all of the behaviours and actions that may contribute to a business’ success. Human nature is such that workers can skew their performance to win their bonus while neglecting other aspects of their role that aren’t captured by the incentive scheme or their job description.
Helping people out, as Cheng notes, isn’t something that can be evaluated formally with a quantifiable indicator – but it can be captured in a subjective assessment.
“You also have a degree of flexibility knowing that sometimes things just pop up that you need to do which may not be formally incorporated in an incentive scheme, especially things like extra-role behaviour, which you can’t describe in a KPI,” Cheng says.
Extra-role behaviours are often as simple as being helpful – such as sharing knowledge with colleagues that will enable them to do their job better, or assisting a colleague who is struggling with a problem. Knowledge-sharing helps build up the intellectual and intangible assets of an organisation.
In their research, Cheng and Coyte set up a fictional firm and told “staff” they would be evaluated on four key areas – an increase in billable hours, an increase in the billing rate, revenue earned from new projects, and evaluations from clients.
The first group was told each of these measures was worth 25% of their bonus. The second was told: “Each month your supervisor is allowed the flexibility to make a subjective judgment based on your overall achievements in these four areas.”
Those in the second group were much more willing to share knowledge than the first, suggesting that a subjective assessment system does indeed increase these sorts of behaviours.
Another aspect of the study looked at the effect of supplying workers with a strategy map, outlining how their various tasks – including extra-role behaviours – contributed to the organisation’s success.
Those staff who were working under a subjective incentive scheme performed more of the extra-role behaviours once they understood how they helped their employer. But staff who were subject to a formula-based incentive scheme were less likely to go out of their way.
Cheng says that by sharing the strategy map with staff on an objective bonus scheme, organisations are in effect sending conflicting messages. They are stating that an extra-role activity is important yet they are not prepared to pay the worker for performing it. In fact, workers know that if they do perform these extra-role activities, it can be at the expense of doing work that is directly tied to their bonuses.
'Sometimes things just pop up that you need to do which may not be formally incorporated in an incentive scheme' – MANDY CHENG
Alannah Rafferty, an associate professor teaching human resources management at the ASB, believes that bonus schemes are just one factor that will motivate staff to perform extra-role activities. Others include the existing workplace culture, how much people enjoy their role and how well they get on with their supervisor.
“[Nonetheless], hard data doesn’t give you the whole story, so any performance appraisal system has to be multi-faceted and draw on various sources of information,” Rafferty says.
Of course, there is the right sort of subjectivity in a performance assessment, such as how willingly a staff member performed extra-role activities, and the wrong sort – such as, do you like them? Are they similar to you? Is one aspect of their performance making their overall performance look better or worse than it really is?
Rafferty says managers can be trained to apply the right sort of subjective judgment.
“Research shows that if you train managers or leaders in how to conduct these subjective appraisals systematically, then you can decrease errors and increase the accuracy and usefulness of those kind of subjective judgments. It’s really [about] helping people understand what potential errors might creep in and how you might go about overcoming those,” Rafferty says.
Richard Kantor, a human capital partner at Ernst & Young, says a mix of objective and subjective measures when assessing staff performance is effective, but it doesn’t all need to be wrapped up in the bonus scheme.
“You can have people paid on a bonus program where the bonus program is purely objective, but the appraisal of overall performance is subjective,” Kantor says.
“People in the real world are in more complex environments and have more at stake. So, whereas my bonus might represent 5% or 10% of my salary, my overall performance assessment is going to determine things like the kinds of work I get to do, my development opportunities and my ability to advance and to grow. In the long-term, that has for most people a much more significant impact on motivation, and frankly, it also has a bigger economic impact.”
Kantor says other studies have shown that if the bonus scheme is confined to things that can be assessed objectively, it creates more confidence in the bonus system.
It’s a point acknowledged by Cheng and Coyte. They say future research could investigate the extent to which the supervisor’s reputation, management style and competence, and employees’ perception of the evaluation system, such as distributive and procedural fairness, may moderate the impact of subjectivity on employees’ behaviours.