Compensation Problems for United
The top headline today on my news feed was about a compensation problem! This is a fairly rare event and this particular case seems to be a gold mine for learning experiences about “what not to do.”
Here are the details as reported by Inc., Magazine in: https://www.inc.com/bill-murphy-jr/17-united-airlines-employee-replies-to-uniteds-new-bonus-lottery.html
“1. Under the old bonus program, employees could receive a maximum total of $125 per month--paid on a quarterly basis, so $1,500 per year maximum--if United met its goals on three key metrics.
2. The new program replaces that system with a lottery. If United meets its goals, all employees would have a chance to win prizes, including Mercedes automobiles and cash up to $100,000. About 1.6 percent of employees would win something.
3. The new "lottery bonus" program adds another requirement, which is that in order to be eligible for the lottery, employees would have to have perfect attendance during the time period. Employees took that to mean no sick days.
4. The program is officially called "Core4 Score Rewards," in reference to Kirby's initiative to build United's reputation as "the most caring airline in a highly-competitive industry."
This seems so intuitively bad on so many levels I cringe to think that United probably hired and paid a lot of money for a compensation consultant to come up with this program. Or, maybe this was a case of the company thinking they could “do it better themselves” and therefore decided NOT to hire a consultant. I hope it’s the latter as anyone in my profession who is advising companies to use this kind of a program for incentive compensation is clearly not qualified to do the job.
Balancing Math & Psychology
I always say that incentive compensation is 50% math and 50% psychology. This program focused 100% on the math and paid ZERO attention to the psychology part of the equation and United is now suffering the backlash because of this fatal error. Clearly, their objective was to save money. One commenter indicated that a $100k prize would be worth about $1.18 per 84,000 teammates. So we can do some quick math here to quickly understand why United did this. If 84,000 teammates are paid $1,500 a year in the current program, that costs United $126m. If 1.6% of those teammates win a prize worth on average $10k, that costs $13.4m. It’s likely the average is far lower than $10k but I thought I’d err on the side of generosity. As with all lotteries, it’s certain that only 1 or 2 people will win the grand prize and that the bottom of the pyramid where most “winners” are will see a far smaller payout. The other thing to note is that prizes have a different cost to United than they do to normal consumers. United is NOT paying retail cost for that Mercedes or those TVs. This is intended to be a marketing campaign for Mercedes, so it’s entirely possible they GAVE United the car for free, in exchange for all the good press about the Mercedes being the giveaway. I bet someone at Mercedes’ marketing group is rethinking that strategy today. In any case, I think we can SAFELY assume this is saving United somewhere around $100m.
For the employee, while this bonus was never guaranteed and depended upon the company reaching its goals on three KPIs, 1,500 on a $60k salary is 2.5%. That’s a fairly normal raise amount these days, so it’s not “nothing” for the employees to give up, even if what they are giving up is only the potential for that money.
I think the bigger psychological problems are revealed in many of the comments found in the Inc., article. Working for a company is, by definition, a team effort. It takes everyone pulling together to make a company, big or small, successful. And for a company as big and as complex as United, in an industry as visible and fraught with problems as commercial air travel, this is even more so the case. From the baggage handler to the mechanic to the flight attendants, ticket agents, and pilots, everyone has a critical part to play in the company’s success. To reduce the reward to a lottery where only 1.6% “win” and 98.4% “lose” is to completely devalue and actually destroy the team culture and camaraderie that must exist for United to be successful.
For the employees at United, and for many rank and file employees at many companies, it’s not about the money, really. It’s about the psychology of what the money represents. Are they winning together? Or losing together? Is it a team or a one-person show? It takes every single person doing their best for the company to reach its KPIs so every single person should have some “skin in the game” for achieving this goal. A lottery ticket is not “skin in the game.” It’s a chance to win when most of the rest of your teammates lose.
Prizes in and of themselves are not a bad thing as an extra kicker or reward. They are commonly used for sales reps for things like President’s club trips or for truck drivers to better outfit their cabs. The difference is these prizes are almost always in addition to a regular, cash-based incentive program AND they are equally available for all if you achieve the specific individual objectives laid out. For sales reps, often the top 10% or so get to go on the trip to Hawaii, but it’s clear what you have to do to be in the top 10%. For truck drivers, the stipulations are clear on how many safe miles you need to clock before you can get the satellite TV installed in your cab. It’s not random. It’s not luck. These programs always have issues in terms of “fairness” (ask any sales rep who was #11 when the top 10 got the trip), but they are far motivational than a random drawing will ever be.
I can thankfully say this is the first time I’ve seen an incentive plan treated as a lottery. Hopefully, it will also be the last.