Compensation Systems For Agile Teams

Posted on December 4th, 2009 in Agile, Management by siddharta || 6 Comments

There is a discussion going on in one of the Scrum lists about compensation in a scrum team. How do we reward individual performers when Scrum plays down individual performance?

It’s a mistake to think that rewarding individual performers does not work in a Scrum team. Forget Scrum, it does not work anywhere in the organization!

As much as thirty years ago, Deming listed as Deadly Disease #3 – Evaluation by performance, merit rating, or annual review of performance

This is because performance evaluation kills cooperation, morale and intrinsic motivation. Individual performance appraisal in particular can kill team cooperation. Why should I share knowledge if it would improve other team members appraisals relative to mine?

A particularly bad thing to do is stack ranking, i.e ranking everyone in order from best to worst. In a competitive environment, there are two ways to win – get better or keep others down. Which one is more common? The easiest way to get to the top of the stack is to keep knowledge to yourself.

Now, are these the kinds of behaviour that organizations want to encourage?

Consider this Harvard Business School case study on Hewlett-Packard.  When HP moved to a pay-for-performance system in the early 90s, this is what happened

The teams were frustrated that factors out of their control, such as the delivery of parts, affected their work. The high-performance teams often refused to admit people whom they thought to be below their level of expertise, leading to disparities among the teams. There was reduced mobility between teams, preventing the transfer of learning across teams. Employees built their lifestyles around the higher level of pay, and were angry when they could not achieve it consistently.

The case study also says “pay-for-performance can cast a pall over self-esteem, teamwork, and creativity” and “scholars have argued that the real problem is that incentives work too well. Specifically, they motivate employees to focus excessively on doing what they need to do to gain rewards, sometimes at the expense of doing other things that would help the organization.”

More recently, Jeffrey Pfeffer testified in the US Congress on Personnel Reform. He said in his testimony,

There are numerous examples of widely diffused and quite persistent management practices, strongly advocated by practicing executives and consultants, where the systematic empirical evidence for their ineffectiveness is just overwhelming. Third, the idea that individual pay for performance will enhance organizational operations rests on a set of assumptions. Once those assumptions are spelled out and confronted with the evidence, it is clear that many — maybe all — do not hold in most organizations. Fourth, the evidence for the effectiveness of individual pay for performance is mixed, at best — not because pay systems don’t motivate behavior, but more frequently, because such systems effectively motivate the wrong behavior. And finally, the best way to encourage performance is to build a high performance culture.

Finally, a quote from the classic Peopleware book,

Internal competition has the direct effect of making coaching difficult or impossible. Since coaching is essential to the workings of a healthy team, anything the manager does to increase competition within a team has to be viewed as teamicidal. Here are some of the managerial actions that tend to produce teamicidal side effects:

  • Annual salary or merit reviews
  • Management by objectives (MBO)
  • Praise of certain workers for extraordinary accomplishment
  • Awards, prizes, bonuses tied to performance
  • Performance measurement in almost any form

Another book that comes to the same conclusion is Alfie Kohn’s Punished By Rewards.

Coming back to agile teams, here is a must read article by Mary Poppendieck on the subject – Unjust Desserts (PDF)

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6 Responses to “Compensation Systems For Agile Teams”

  1. Robert Dempsey Says:

    Great post Siddharta. I agree 100%. If companies want people to work together they need to compensate people that way. Misaligned benefits creates more internal competition that teamwork. While competitiveness is good, it shouldn’t overtake community and working toward a common goal.

  2. Gerry Kirk Says:

    Perhaps the title of your article should be “How not to compensate Agile teams”. I was hoping to see alternative models to the ones mentioned above.

  3. siddharta Says:

    Yeah I haven’t blogged about the solutions here. In the next post :)

  4. Ajay Danait Says:

    I have observed that 360 degree appraisals and appraisals where the team votes for each of the team members using “Position Paper”, “Planning Poker” and “Affinity Clustering” (anonymous as well as named).

    Simple things like –
    What are my aspirations? How am I equipped ? How can I help others achieve their aspirations? How does that improve our velocity? etc.
    in each individual position paper.

    Creating a backlog with multiple prioritized items on a quarter basis and annual basis. Measuring each team member’s achievements, the velocity of those achievements.

  5. Ramprasad Says:

    Very nice.This requires a culture change in organizations and we need to work really hard to bring this in.

  6. siddharta Says:

    Yeah, though its not easy unless you are creating a new company from scratch

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