The carrot and the stick: Reward and punish for maximum productivity and profits
ILLUSTRATION BY RUTH MACAPAGAL
A question many of my clients around the world ask me is how to properly incentivize and reward people for top performance. Let’s face it: in many economies around the world, companies celebrate mediocrity. People are not fired when they should be. Rewards are often given for showing up only, not for exceptional performance.
One of our clients, a wealthy CEO of a family business conglomerate in Singapore, was under the wrong impression that the “carrot” would solve it all. As a result, he never reprimanded underperformers. Even people who had made him, his company and his family lose tons of money still kept their job.
In a board meeting, he asked me, “Tom, what do you think is the issue here?” I bluntly replied, “Your company has tolerated underperformers for far too long. You are too nice. People do not feel the consequences of their actions. You need the carrot and the stick.” He asked us to implement a program that weeds out nonperformers across the organization, and properly incentivizes the high achievers.
A few months later, a new wind was blowing. Four board members were gone, the fifth on her way out, and the entire conglomerate was beaming with renewed productivity because everyone got the message. All new hires were 10/10 top performers.
The psychology behind the carrot and the stick
The carrot (reward) and the stick (punishment) come from the old metaphor of a cart driver dangling a carrot in front of a mule and holding a stick behind it. The carrot is a lure and the stick is a threat of negative consequence. In psychological terms, this represents positive and negative reinforcement strategies, respectively.
• Positive reinforcement: This involves offering rewards to reinforce the behavior you want to see repeated. Rewards can be financial, such as bonuses or stock options, or nonfinancial, such as public recognition, promotions and professional development opportunities. We have seen that public recognition often works better than cash.
• Negative reinforcement: Contrary to common belief, this is not about punishment. It involves removing certain undesirable elements in the workplace as a reward for good performance, for example, allowing more flexible work hours after a team meets certain targets.
• Punishment: This should be used carefully and fairly to discourage undesirable behaviors. This could be in the form of demotions, pay cuts, or formal reprimands.
The propulsion system
The nature of human beings is that they ideally need two drivers to move fast toward a goal and reach maximum productivity: something to move away from (the stick) and something to move toward (the carrot).
High-performing environments are not fostered by leniency and unconditional rewards. They are the result of meticulous management of both incentives (the carrot) and penalties (the stick). To implement these effectively, CEOs and business leaders must understand their unique dynamics and impacts.
The balance of power: Reward vs punishment
Balancing rewards and punishments is crucial. Too much reliance on punishment can create a climate of fear, which stifles creativity and innovation. On the other hand, excessive rewards can lead to entitlement and complacency. This creates an environment of low performers, people slacking off and mediocrity. In some countries, this virus can invade an entire economy. Oman is such an example, where a lot of executives feel entitled to promotions and raises regardless of how they perform.
The key is to create a fair system that:
• clearly communicates expectations and consequences
• recognizes and rewards high performers; and
• swiftly and fairly addresses underperformance.
The strategic implementation of carrot and stick
Rule No.1 for business leaders: be fair and transparent. I have seen a lot of bad examples where executives have no idea of what triggers a punishment or reward except for how the CEO feels that day. That’s bad. You need to be very clear about how you evaluate performance and communicate this even more clearly. If employees think you are making decisions on a whim and there is no basis to how you evaluate performance, you have already lost. They will never give you their 100 percent.
1. Setting clear metrics
Performance metrics should be clear, measurable and closely tied to the company’s strategic objectives. This clarity helps employees understand what is expected of them and how they can achieve and exceed these expectations.
2. Tailoring incentives
Incentives must be aligned with the roles and personal motivations of employees. Sales teams might be motivated by commission-based rewards, whereas creative teams might value recognition and opportunities for professional development. It’s important to personalize the incentives to maximize their impact.
3. Consistent and fair application
Consistency is key in the application of both rewards and punishments. Inconsistencies can lead to perceptions of favoritism or injustice, which can undermine employee morale and productivity.
4. Creating a culture of accountability
A culture of accountability involves everyone at every level of the organization. It means that high performers are rewarded, potential is nurtured and those who do not meet the standards are helped to improve or are let go if necessary.
5. Feedback and communication
Regular feedback loops between employees and management help reinforce the desired behaviors and provide opportunities for correction before formal punishment needs to be considered. This also helps in making the employees feel valued and listened to, further enhancing productivity.
6. Case studies and outcomes
Many leading companies have effectively used the balanced approach of carrot and stick with significant success. For example, a technology giant known for its stringent yet fair performance reviews has consistently been at the top in terms of innovation and market share. Another example is a multinational consumer goods company that revamped its reward system to focus more on team performance rather than individual achievements, which boosted overall company performance.
What to watch out for
The balance of reward and punishment, or the carrot and the stick, is a dynamic and complex tool in your arsenal as a business leader. When applied thoughtfully and strategically, it can lead to significant improvements in productivity and profitability. As a leader, you must ensure that you are not only fair but also transparent in your approach to implementing these measures. The goal should be to foster an environment that promotes high performance and continuous improvement, where high performers are motivated and underperformers are either uplifted or appropriately managed.
In essence, creating a high-performing environment is not about choosing between the carrot or the stick but knowing how to use both effectively to guide your team toward excellence and success. INQ
Tom Oliver, a “global management guru” (Bloomberg), is the chair of The Tom Oliver Group, the trusted advisor and counselor to many of the world’s most influential family businesses, medium-sized enterprises, market leaders and global conglomerates. For more information and inquiries: www.TomOliverGroup.com or email [email protected].
