They Will Never Learn

Amazon Willingly Nose-Dives into Pay-for-Performance

Amazon CEO Andy Jassy. Credit: Thos Robinson via Getty Images

THE AIM for today’s newsletter is to review Amazon’s latest contribution to performance management: a totally revamped compensation model that finally, finally, splits the proverbial atom and creates a structure to consistently identify and motivate top-tier, above-above-average employees. It comes to us courtesy of a recent Business Insider article by Eugene Kim: Amazon revamps pay structure to favor 'consistently high-performing' employees.

Within we learn that Gone are Does Not Meet, Meets, and Exceeds, replaced by a five-layer strata that categorizies a year-over-year Overal Value (OV) of an employee’s performance, with commensurate awards of up to 110% of the position’s pay-range:

Amazonians can now compete to be Top Tier (TT), High Value 1-3 (HV), or Least Effective for performance appraisals. Of course, you don’t want to be Least Effective, imagine having to accept that and finding the will to carry on! More experienced students of Deming will undoubtedly chuckle at this compensation grid that takes the lessons of the red beads to whole new levels…

What’s Wrong with This Picture?

Well, just about everything, but it is really instructive to know just how embedded into corporate culture the idea of evaluating the person apart from the system is, and also the unspoken belief that everyone is withholding effort until it is induced out of them with a range of four carrots and one stick.

We’ve covered this topic many times here as it is a touchstone of thinking, seeing, and leading with Deming view. Let’s review why pay-for-performance is a lousy way to manage employees:

• The majority of performance (and problems) belongs to the system, not the individual alone. We learn about this phenomena in The Red Bead Experiment - no matter how hard the willing workers try, their performance is tied to the distribution of red and white beads in the bucket and the paddle in their hand, a metaphor for all the inputs a typical employee has to ameliorate into their work and are appraised for delivering. The system and worker together determine the quality of work done. “No amount of care or skill in workmanship can overcome fundamental faults of the system.”

• It follows that it is not possible to cleanly separate the performance of the individual from the system: the two are integrated. Take Dr. Deming’s thought experiment about the equation with two unknowns: x + (yx) = some performance metric. We do not know the extent to which an employee’s work system (y) affects their performance (x) - it varies depending on the task and surrounding inputs and constraints. Sometimes not at all, sometimes quite a lot. Yet, we pretend that effect doesn’t exist and unwittingly rate the employee for the performance of the system. Worse, we behave as if people withhold effort, waiting for a bribe.

• All systems exhibit variation in how they perform, some days up, some down; setting individual performance awards without awareness of this phenomena is like rewarding the weatherman for a nice day. It also creates a cynical disposition in the mind of the employee where they can clearly see effort-in does not always equal reward-out: there’s something else at play that they cannot control. We’ve spoken a lot about variation here, as it is one of the vital New Leadership Competencies.

• It also plays into a common misconception about what it means to be above average. This is basic math and statistics: in order for someone to be Top-Tier or High-Value 1-3, there has to be someone who is Least Effective. The incredible irony for Amazon is that there will come a day when one of their TTs or HVs suddenly becomes an LE — what psychological effect will that have on them? Put more simply, this is all about shifting the average rather than improving the system.

• Finally, it is a contributing factor to the destruction of the individual’s sense of self-worth which is reduced to chasing rewards to avoid penalties. This is part of the Forces of Destruction Dr. Deming described that we discussed in our Mar. 8/23 newsletter.

Don’t believe me? Review our Apr. 20/23 newsletter about the CEO of high-end furniture design company Miller-Knoll and how she said the quiet part about bonuses out loud during a virtual townhall. tl;dr, if incentives drive performance, when the chips are down and Hail Marys are required, they should be doubled or tripled — but are they?