In the Science Times on Tuesday, Dec. 16, in a piece entitled “A Crisis of Confidence for Masters of the Universe” Dr. Richard Friedman, writing about the  impact of the economic crisis on high achievers, notes:

“On Wall Street…a rising tide lifts many boats and vice-versa, which means that there are many people who succeed – or fail – through no merit or fault of their own…

“…It turns out the way a reward is delivered has an enormous impact on its strength.  Unpredictable rewards produce much larger signals in the brain’s reward circuit than anticipated ones.  Your reaction to situations that are either better or worse than expected is generally stronger to those you can predict.”

While the theme of his article focuses on the loss of self-esteem (“now I feel like a loser”) of heretofore successful men (he notes women react differently), there are implications for rewards strategies.

Most employees have an expectation of what their raise / bonus will be, based on the organization’s culture, history and their perception of their performance from clues they receive throughout the year.  Woe to the manager who ‘underrewards’ an employee who perceived s/he deserved more.  At best the employee sulks and performance generally decreases until the employee achieves acceptance, either on his or her own or through an external jolt (which requires investment of the manager’s time to develop effectively). The more serious problem would be if the perceptions about the employee’s performance become ‘locked in’ in both the manager’s and the employee’s minds and the signals cause a performance reset at a new, lower level.

On the other hand, the high-performing employee who receives a larger-than-expected reward will become overconfident, and start ignoring warning signals that individual performance is deteriorating.  Unfortunately, in many cases, this is reinforced by managers who are reluctant to ‘tamper with success.’

Almost all organizations do some form of individual employee performance appraisal, be it the old MBOs (some of you are old enough to remember those!) to the more recent forced skews popularized by GE, where only a limited number of people could get superior ratings, and a fixed percentage had to get substandard ratings (can be pretty brutal, but then again, I recall getting a resume once from someone who clearly was of the Lake Woebegone school, proudly proclaiming that every single one of his 7-person team attained superior ratings!).

Reducing the unintended consequences of unexpected rewards requires effective performance management, something sustained high performance organizations do very well. This requires:

1. clarifying how each employee contributes to the organization’s objectives;
2. delivering constant and constructive employee feedback; and
3. establishing and communicating a system of truly differentiated rewards (tangible and intangible).

The words are easy to write; effective program design and implementation is a tad more difficult.