Steve Kerr - Reward Systems: Does Yours Measure Up?

Today's guest argues that blaming employees for behaviors that drive you crazy is tantamount to what BF Skinner called blaming the rat. Skinner coined the term to describe the frustration he felt in the early days of his career when he would run experiment after experiment and his rats wouldn't do what he wanted. He recalled screaming at them one day, why don't you behave, behave as you ought and later on he had a painful insight, his rats were behaving.

He had been designing his experiments poorly and his rats were responding rationally to a flawed reward system, viewed through this lens the bad news is that you are responsible for the dysfunctional behaviors that so bother you. But the good news is that if you're causing it you can fix it and today's book shows you how.

It's a beautiful book from the memo to the ceo series and we're joined by the man who led the legendary leadership development centers in Croytonville for general electric and pine street for goldman sachs the author of, Over my shoulder here, ultimate rewards, the boundaryless organization, the GE workout and the focus of today's book, this one reward systems. Steve Kerr, welcome to the show. Thank you very much, happy to be here. Steve man, o man,.

I really wanted to shine a light and get your work out there. It's years.

It's decades since you wrote that famous article, one of the most cited of all times, the folly of rewarding a while hoping for B and we're still doing it. It remains such a pervasive problem. For people who won't join us for the entire session. It happens. Sometimes I see it on the YouTube stats that people zone out or they get distracted.

In the book, you really focus on three main elements.

Three step process to help realign your reward system because this is true the work you've done with GE did this with many many companies that is a consultant, let's share at a very top level like a sentence on each those three steps because, this is the elevator pitch this is if you only had five minutes you know what you appear on cnn or something you have a few minutes to give a pitch, what is it and then we'll go deep into it for the rest of the show.

The way this stuff shows up most often is in the reward system. People behave. Same way rats behave and hamsters behave, you go for the sugar cube as you avoid the shock. Rewards are the focus, because it shows up then. But rewards have to be the third thing you do.

And your reward system cannot be stronger than your measurement system. In fact, people often are their own rewarder, and a lot of times you don't get in trouble with bad rewards if people do the right thing. So measurement is the second thing. You've got to measure behaviors, so you don't know who to reward, you don't know who to discipline, or educate, or invite. And measurement is second, but measurement itself has to be, what are you measuring?

And, and even in a place like Six Sigma, which are in the forefront, if you're not careful, you'll end up measuring the things that are easy to measure, which may not be the keys to success. So of course you can't reward the right things because you don't know what they are. And you're going to measure the wrong things if you haven't defined performance thoroughly. What are we defining as performance? How can we do it better? What are we measuring, and how does it relate to what are we defining?

What happens if you do these things? And you're doing the right things? Now what does the organization do? And you look like a genius and it's as basic as can be? What i love steve is that this is applicable to any size business this is applicable even as a parent how do you set up reward systems for your child to learn and to lead into learning etc it's so useful for a wide range of things.

So for those who love deep dives we're going to go deep , I always tell people when they would come, my job is to unimpress you. . If I do my job, you're gonna say two sentences when you leave Croytonville, and the first is gonna be, I expected more than that. And the second sentence is gonna be, we could do that. That was always my goal.

i love when you said that in the book that was the whole idea of my job here is to unimpress you when you bring people into the companies i gonna tell you up here towards a great example you use right at the start of the book where you talk about the healthcare system and a little quote for you just to get you warmed up you said the basic principles behind a successful reward system, are as well known as putting out the monthly payroll and doing it well.

There's a huge competitive advantage to be hard by doing it well that's up for the first example you give us which is the health care system as an example, There are two things you can do wrong. You can call a healthy person sick or you can call a sick person healthy. In theory, they're both things to avoid.

You call a healthy person sick, now he's taking medicines he didn't need, he may undergo needless surgery forego favorite activities, and obviously you don't want to call a sick person well because the person who will go out there is probably going to go worse because you failed to treat them. . So that's where we begin. I'm not saying you Everything has only one cause, but I start by saying, okay, why would rational people be doing that? First, , what's the irrational thing they're doing?

So they've done many studies. These are updated frequently, and they look at the likelihood of type 1 error, false positive or false negative type 2, and it's usually when they, when they compare the hospital records, 26 to 1, 37 to 1, 14 to 1, it's not random mistakes, It turns out the first thing is they're much, much, much more likely to call a , healthy person sick, a key cause is, , you will never get sued for the useless tests you do perform.

But you may well get sued for the useless tests you failed to perform. So again, there's no villain. Maybe you know, you ought to do what's right. But this isn't about bad guys and good guys. Why do they do this? They do it because it pays off. Or at least in their mind they do it. Why else would they do it?

it's a great analogy for what happens in innovation steve where the, you'll go after the incremental, Non risky innovation rather than the stretch one that could pay back massively and just to link it back to the medical example you say, for example because they rewarded variety of ways for having a high patient recovering recovery rates many hospitals prefer to admit relatively healthy patients and some hospitals, i've achieved notoriety by turning away people who are

desperately in need of care hospitals are also rewarded for admitting people who could be, Treated more efficiently as outpatients running up the bills during their stay and delaying or expediting their discharge for economic rather than medical reasons again, reward systems That's exactly right. And again, These are not doctors who are stealing the money and going to Bermuda on vacation . These are not bad people. They got to pay the bills to keep people longer.

A lot of people get this charge on the day the insurance stops. In a way, they're being kind to their patient. They're not running up the bills but they're saying, look, the government toss out some money and that's what they'll do. Your illness may require three, but the insurance covers seven.

Feel free to link this back to your experiences with the various companies you work with you said another problem is the hospitals aren't reimbursed at all for preventive care or get much less than they receive for treating existing symptoms and i thought about how, what's the same in an organization that say i'm the leader and i go.

I'm going to invest to prevent some problem in the future like cyber security i invest in something in case it ever happens because you invest in it it never happens, so as a result i don't get credit or i don't get recognized for preventing something that could have happened it's kinda like floods you know the whole idea of investing in areas to prevent flooding and that same reward that is so broken. i wondered how do you fix that.

So, as a leader i'm running a company and i need to put in place innovation systems that i build r and d that i invest in the future, these things may or may not work out and they may work out after my tenure and i won't even get any of the credit for that.

There are a number of things you can do to address it, for example, the idea of stretch goals. It was Welch's idea, and what it did was it increased the penalty for not setting stretch goals. Because of what you said, on the one hand, if I stay with the, what's true, we got a good quality control system, and errors will be low. It won't be noticeable because they are low, and so it was inadvertently rewarded, the lack of innovation and so on.

If sometimes doing it right means it's the absence of being noticed. So now I'm sitting there and the people, they're not enjoying what happens to them if they got low performance, but if they had bad quality in the area, that's where the money's going to go. So we had stretch goals, and Jack said, a stretch goal is a goal that you set and commit to, without having any clear idea of how you would get there.

Stretch simply means if you do a linear extrapolation for what you've been rewarding and what you'd call improvement, at all, it wouldn't get you to this number. And so they said now this being GE, are you forgiven? He says, hell no, but but I'll know that the goal is high and I will reward stretch goals. And anyway, I know what you're doing now, and if the goal you set doesn't show stretch goal, that should worry you more when I find out than trying it and failing.

So we said one of the questions was how are you doing on that metric compared to how you did last year? How are you doing compared to the rate of improvement you were getting year to year without it? So you never really ask the question, did you make your stretch goal? Because it's not a fair question.

We had Sven Smit he wrote a book called strategy beyond the hockey stick and he was talking about how, people promise these goals the stretch goals but they never ever come in on target just to get the resources That's a big challenge of this is that they do the board meeting they present their strategy for twenty twenty five they go here's what i'm gonna aim for, but they know they're never gonna do it but they promise that in order to get the resources to get the funding to

get the people and then they know and it's almost like this game in the boardroom, but they know they're not gonna achieve it but they have to almost tell these porkies these pork pies in order to get it over the line that's a huge problem with this. It's a huge problem if you don't plan for it. There's things you do at the front end you create a good reward system around reward systems. You say, you can do this, , and maybe get away with it for a cycle or two, but, we're not dumb.

In the end, this is not in your best interest. We would have to make quarterly goals at GE, you don't want to miss it and you really didn't want to miss it. And , the, the rewards for making was sometimes the absence of pain you know, going for the quarterly review with Jack and, and how'd you do on X. He knew damn well how you did on X, . So they're creating definitions that are gonna save their butts at review time. So they start sending definitions that are self serving.

We have to meet our delivery schedules. But delivering meant left company property. So we're supposed to build these giant turbines, and we're late on some, any number of reasons. So on March 31 They get shipped. Where are they shipped? They're shipped to the loading dock. They're now on a train going nowhere because it's not yet ready, and our workers are now at the loading dock, finishing what they have to do.

It really, wasn't ready to leave, but we're not going to, we never would give the customer bad product, but the point is, left company property. So that's what the airlines do. The airlines have metrics. Departing on time. They count the percentages, the percentage of flights that leave on time. On time meant they closed the door and they went. Where are the planes? Some of them, they're on the tarmac. They're going nowhere. They're not ready to leave. But they left the gate.

We're gonna be a little while, folks. And if you don't realize what you're causing, it's not pretty when you encourage bad behavior because you often get bad behavior.

i just wanted to show for people who didn't know what i was talking about the idea of the hairy back which is what Sven Smit, Talked about so this is where you have the promise of all this is what we're gonna do in twenty eleven and the actual performance you can see is much less than you create what he called a hairy back problem inside an organization but i just wanted to share that and then, let's build on what you just said because you give this really chilling example that flawed reward

systems have also worked against.

National interest in times of war and you give the example of world war two versus vietnam and this really brings it home. What does the military want? You want to win the war, and that's very important. You win the war. And what if they have a soldier? I want to get home alive, preferably with all the legs and arms I came in with. It depends on the reward system. You're not going to reward people for getting shot at. It's unpleasant. You have drafts and some of it's involuntary.

I don't have any way around that. But the point is that in World War II they want to win the war at the top and the guys want to go home and the gals at the bottom. In Vietnam the war was more controversial, so you couldn't rally around the flag. We're all doing this for the greater good. A lot of people were marching against the war in America anyway. So they had a 13 month tour of duty. So now, what does the country want? They want, the bosses want to win.

But, in the World War II, you want to go home, you better win. Otherwise, you stay longer, some bad stuff can happen. In Vietnam, it was totally disconnected. The organization goal was separated from the individual goal. The terms that came out of Vietnam, search and evade, they were terms they would sarcastically use with the people. They would look for the enemy here, if they found him, they would look for him somewhere else.

And the worst of it was fragging, which I guess was rolling the grenade into a commanding officer's tent while they slept. That's called murder. It's terrible. But it was not done randomly. These were people who were going to look good by mostly not going with them, but sending people into crazy danger. No one's defending it. I'm not here to justify. I'm saying you're causing it. You're, you're causing it. And if you don't like it, you shouldn't like it.

You should stop steve mentioned this killing of your officer who was going to send you off to what you maybe thought was certain death. So you're trying to avoid this. You're going, it's in our better interest not to do that. Let's kill them. So they killed the officer in whatever way they would. And I thought, well, metaphorically.

That happens inside organizations all the time that a new leader comes in she has all these ideas about change, she's gonna restructure the organization people are gonna lose their status they're gonna change different elements they're gonna be working in different places and they, Metaphorically frag the leader so they kill the leader by undermining them by making it difficult by frustrating them so they leave and i wondered about what your thoughts were on that one

It happens and some people will do that. It may be personal. People enjoy making other people look. They promoted him out of me or they brought this person in instead of promoting me. You're going to show them what a bad decision it was. Well. Rewards are designed to change behavior, to create incentives. People change themselves because you don't say, why don't you do stuff that's not in your own best interest? You say, to do stuff in your own best interest is to help the organization.

And I realize it doesn't look that way. At the end of that, sometimes the old story was that sometimes after you get done trying to change the people, you got to change the people. And that means, training, development, motivation, but sometimes selection. Now, you can make the criteria fair. You can prepare people so that they know they had an opportunity. They even know, if you're doing it right, that Ernie honestly believes that the new person is better than I would have been.

You do this stuff right and you make it as visible as you can. And that way they will know that the boss was trying to get it right. He wasn't doing this to hurt me. It just was the result that it did. Doesn't make them pleasant.

But then, again, Performance Review is a whole nother topic. The best way to do Performance Reviews, you can't do one a year and have it be good. You cannot. Because you can't use the same thing for development and control. So you've got to separate them. And the spring is when you do development, and that means no hard copy goes to HR. No hard copy goes to your boss. You do peer review. The boss does a review of you.

And the tone is if I were to see this behavior in December when it counts, I would have to dock you. You would lose a category. You'd lose pay. So fair notice, please. And we'll work with you if you need help, that's what HR, etc. That's what you do in the spring, and no hard copy at HR. You just say, if this behavior persisted in my mind, I would have to take off enough points, or you're not going to be a GM someday. If I'm right, you got six months to improve.

And believe me, you hit the resources. You don't use traits. Traits can't be, you're too short, you can't reach the top shelves. That's not helpful. But , you put it in terms that people could understand and act to it. And then you also, in, in December, I may be wrong, you have six months to prove me wrong, and now you know what I'm looking for.

And by the way, the other thing I did I would, every time I did a review of my people, no matter what, I've been a dean, I've been a provost, anyway, in my different jobs every, I said, when you come to the interview, one thing you're gonna, we're gonna talk about is, you're gonna tell me one thing, if I did it differently, would help you do your job better. Everybody makes mistakes. I would tell them, I'm good for two mistakes a week. I wish I didn't do those two.

If I knew which two, I wouldn't do those two. And you make it safe and they'll give you, stuff about you that could really help you do a better job. i have this process i call reverse on boarding that anytime i work with someone new i lost them after six weeks to present back to me. What am I not doing? What am I doing that's irritating, et cetera. Unfortunately, I also, I said this to my wife and she has no problem telling me, , all the things I'm doing, I'm doing wrong.

Steve, I have another one for you. So we talked about , the fragging of the leader. And this happened to me myself on a lot of the audience of this show works in transformation efforts in at some level throughout the organization chief transformation officer lmd. H or lots of change levels and sometimes i wondered how you spotted where they'd be undermined from above.

Where if they were successful it would mean that this person loses some type of compensation or that whole idea if you're gonna be cannibalized make sure you're cannibalizing yourself. You did a lot of this in GE, where you foresaw the future and you took actions today to make sure that you weren't the victim of this from some outsider. And I wondered how you handle that or how did you see it?

Because with your knowledge and your psychological safety to be able to pipe up to people like Jack Welch and go, Hey man, that person is getting absolutely slaughtered because they're making change. How did you present that? And how did you manage that? One of the things, again, people are welcome to it. I did it, and Jack didn't want to copyright any of this stuff. But the question was, if you were to do each of the actions described below, what would be the organization's likely reaction?

And the choice was, , one would be awarded, two would be approved, and three was nothing much would happen either way, right? Fourth would be I would be punished, and five would be I don't have no idea what would happen. And five and four produce similar behavioral consequences, because people are not that curious to see what's going to happen. Maybe the boss is going to yell at me, or when he won't.

Four and five produce the same kind of behaviors by the subordinate I wouldn't do it if we were just talking through and, and getting into that thing, and maybe we'd start with a positive and work our way. But in when I went to do it with whole departments, or have my people do it, we would, if Croakville would do it, or we called it Pine Street or Goldman, then I would, they should do that survey. But the list of things would be the things that people are complaining about.

And so what happens if you do each of the actions? Bring my boss unpleasant news, tell my boss he's wrong when he thinks he's not.

And things I did, I let my subordinates take the credit for things done, , and you can make it anonymous if you need to, but there's less ability to address it, but if it's firm wide, it doesn't matter who said it, and they would say, if I do that, my boss will get really attached, they'll assume I'm not doing my job, they'll start bringing stuff to my subordinate when I'm out of the loop, and again, it could be paranoid, but it could be accurate,

Shouldn't that just be the way always that you have this candid culture where you can pipe up and, you have to share bad news. Many of the case studies I've read and studied about innovation disruption. No. Yeah. For an example, Enron, one of you mentioned in the book that people could not share bad news. They were absolutely slammed for it. They were absolutely destroyed for it. And if it was any way encroaching on, well, our behaviors are a little bit, maybe touching illegal.

Then they certainly slammed those things No, you're absolutely right. And back to Skinner, it's called Blaming the Rat. That's where we started our talk. Well, Jack, you were a really scary person. He's noisy and he's right. Given he's noisy, it's good that he's right. But it's quite intimidating. And again, I, I, I just knew him in a different way. He didn't, he didn't. do that with me, and I had to buy machines. So you put them on each desk.

Again, you got 75 people in the lower level of classes, and left if it's a yes, no, or for or against, and so I got them because Jack was just scaring hell out of people. So he would go through and he says God, India, I got back, it's really exciting. What do you guys think of it, India? Great, Jack, great. So I said, if you think Jack, wait, we got to use this thing we paid for. So, um, And then it comes out, you know, 30 percent people think we shouldn't invest a dime in India.

Because it was anonymous It's just like 70%. Who said that? I said, Jack, the reason we bought those machines is so you don't know who said that. I'm so glad you're sharing this because there's so many people who work in , small organizations where the founder is involved, a family business, people struggle from this all the time and they end up becoming yes, men and women,

and you can't have an innovative culture when that's the case you need to know bad news quickly it's one of the reasons i think the book is so important steve i think we'll probably leave it there actually and, I'm gonna open the next day talking about is a great table about the dysfunctional, behaviors that you have an organization we'll discuss the bulls i exercise the blank sheet exercise that you talk about, Yeah, that's how it flows. The bullseye is where you can do the definition.

Then you move over, you can use the clean sheet exercise if you want for measurement. And then of course, we've already talked about some of the reward stuff, but you take desirable things. What is the boss sick of seeing? Bad things. What does the boss want to see more of? Then you mix them up in a questionnaire. And the question answers are simply, I'd be approved or rewarded. And the five says, I'd be disapproved or punished. And three says, no reaction of any kind.

And the one is, I don't know what would happen. And you can drive a hamster mad. . If I were scared, I wouldn't do them either. Trust your people, make it safe, and verify. Reagan said that, at the presidential level here. I mean, Trust but verify. Author of reward systems steve Kerr thank you for joining us for part one, My pleasure