We've talked about different theories for understanding how people are motivated, expectancy theory and goal-setting. Now let's talked about some explicit leavers, that we use in organizations to actually build that motivation. Often we talk about two different sources of motivation. One is extrinsic, external rewards that people receive that motivates them. The other is intrinsic, things that we do because we value them in ourselves. Start with extrinsic motivation. That's a one form of extrinsic motivation is the promotions that we talked about with Chipotle. But the other form of extrinsic motivation, and the one that is probably most commonly thought of in the context of driving performance is pay. This is the reward that we think of people really showing up to work for every day, we can't live without it. It's something that we can leverage to shape people's performance. How do we use pay in all strike performance. Pay shapes performance, I think in a couple of ways, and I want to go through them. One is the fairly explicit pay-for-performance, the incentive scheme, and the second is just the sheer level of pay. Let's start by talking about pay for performance. The incentives gives it. A nice example here is Nordstrom. I don't know how many of you are familiar with Nordstrom. It is a department store. Again, I'm afraid in the US, a very successful department store. For a long time it had the pretty much the highest sales per square foot of pretty much any department store in the US. Department stores have been a sector that has struggled a lot with on the growth and online shopping, but perhaps surprising Nordstrom has continued to do very well. What underlies it's success? The heart is a strategy, a very strong customer service. This idea that when you go into a Nordstrom, somebody there is really going to help you figure out what is going to suit you, what clothes, what shoes and so on, are going to work best for you, and the salespeople are going to do whatever it takes to make you happy, and therefore to make the sale. The core of the strategy then, is having salespeople who really want to be successful, really want to sell. How do they do that? Probably it's called goal setting, that I've been talking about. They give everybody goals, sales per hour goals, we expect you to hit this goal. Sales per hour over a two-week period, then show that people actually committed to it. If you're not hitting your sales per hour goal, you're going to be getting fewer shifts. You may ultimately be at risk of being terminated. If you are hitting your goal, you're going to be getting better shifts. On top of that, they often make these goals public, so we can see where everybody is against it. I mentioned with the taxi drivers, the challenge with goals, is they can be a ceiling to performance. We pull you up towards it, but we may also prevent you going much higher. One way they try and get around this, they also have a lot of competition. If you're already regularly hitting your sales goal, then we might think of this competition to be in the best top 10 percent of salespeople, can you do that? But if you're doing that, maybe getting into the top one percent. These different levels of goals, help people be motivated. But a big part of it also, getting to this issue of extrinsic rewards. A big part of it is the compensation. They offer high commissions or any sales that you're making above your target. They're getting commission of around six to 10 percent in addition to competitions, and prizes and so on. We've talked about expectancy theory, so here we have this really tight tie between your performance in terms of your sales, and your outcome that reward in terms of how much money you're making. I mentioned, we also need to make sure that there is that sense of self-efficacy, that expectancy. I need to believe that my effort matters. One way they achieve this, is by giving their salespeople that incredible amount of autonomy. It used to be, they had a very thin guidebook, salespeople just use your best judgment at all times. The lawyer is going to be involved, and they need you to put a few more guidelines in place. But by and large, they leave their salespeople free to figure out how are they going to build their franchise? How are they going to build their relationship with their customers? All of those things that they have tremendous autonomy to figure out what it is they're going to do to run their business, and turn their effort into money. This is a great example where it appears pay for performance is really working, and helping to motivate people to drive high-performance, in this case, very high customer service. Does this mean we should use it everywhere? Does this mean that the key to successfully aligning the incentives of our workforce with the organization, it's used to pay for performance, to reward them with their pay based on their performance and whatever they're doing? No. Why not? Well, the great thing about pay for performance and these kinds of rewards is they really do focus people on performing the tasks that you're rewarding. But the challenge that we have is that in many jobs, we want people to do more than one task, and some of those tasks, we can't measure their performance terribly well. When we give pay for performance, we end up getting people to do exactly the thing we ask them to do and very little else. If you think about Nordstrom, we're going to be very good at getting people to sell. But maybe we want them also to help out their colleagues and maintain the stock. Well, it's going to be challenging to persuade them to do that because that costs them money. You want me to mentor salespeople well, that's interesting, but I didn't get paid to do that, so I don't think I should do it. In some cases, that very narrow focus works for us, but in many roles, it doesn't. This problem of how pay for performance ends up with people pursuing very narrow goals described in various different ways, economists sometimes call it the multitasking problems, sometimes described as getting what you pay for. An evocative phrase used by a guy called Stephen Car is hoping for A while rewarding B. That we hope for something, we hope our people will do all these wonderful things for us, but we only reward actually something else. This rewarding people on a few measurable outcomes, that's some classics. What we want is quality performance, but if we pay for quantity, quantity is what we get. We often want people to work in teams together in order to drive strong performance, but what do we reward individual performance? It's interesting, in preparing for this, I was looking through some of the Glassdoor reviews of Nordstrom and you see that lot of people are positive about working there, but some of them mentioned, yeah, be careful of other salespeople. They will try and steal your sales. My Manager stole my sales from me, and all of those things. This very individualistic scheme is not helping us with teamwork. If we're in an organization where really we need people to work in teams, where teamwork helps, think Trader Joe's. This performance is not necessarily going to be a good idea. Performance, we reward result. We really focus people on results, not how they get there. If what we want from people is ethical behavior, we may be out of luck. One of the classic examples of that in recent years comes from Wells Fargo, a US bank. Wells Fargo figured out like a number of other institutions that their customers who have multiple accounts with them tended to be more profitable. They thought of cross-selling, getting customers to buy more than one product from them as a great way to increase profitability. They wanted to do that, so what did they do? They started to reward all of their various customer service representatives for opening new accounts with their customers. The customer service representatives said they're really under incredible pressure to do that and so that people did exactly that, they opened up lots more accounts for their customers. They discovered it was even easier to do this if you didn't bother to ask the customer first. This was not isolated behavior. They reckon that about one half million accounts may have been opened without people's permission. People started finding out when they were getting late fees and these sorts of things on accounts they had no idea existed. Big disaster, huge [inaudible] Wells Fargo, CEO loses his job, I think over 5,000 people were terminated over this. Not ultimately something that benefited the organization and a classic example of people getting what they paid for. You want to be very careful with pay for performance. When it's well-designed, at Nordstrom, where you really want people to do just one thing, just to sell well, it can be very effective. When you want people to work in teams, when it matters how they get the results, when you want quality, you want to be much more careful. One solution can be, if it's teamwork that's important, maybe we don't pay the individual. What can be effective is we don't have pay for performance at the individual level, but we're going to give pay for performance at the store level. Take [inaudible] , my favorite sandwich store, they're obviously people need to work together. They don't want to reward individual salespeople, but they want people performing. One thing they do is they have a mystery shopper. Every week a mystery shopper would come around the store, will buy a sandwich, will assess them on the quality of their service. If they get a passing grade, everybody in the store gets paid, I think. Everybody gets an extra pound per hour for every hour that they work during the course of that week. We use pay for performance, but we're actually fostering teamwork in that way. Yes, money is an important incentive, but you want to be very careful in how you leverage it to motivate your people.
