Enough with the Teamwork!

May 2010

The axiom, although unproven, that teamwork is what drives business success has become the widespread premise for many corporate directives. Business leaders exhort their employees to exhibit more of it. Companies task self-directed teams with their important business initiatives. And new-product development is based on the concepts generated by brainstorming teams. To support all these team-based efforts, a popular incentive practice is to evenly—or mostly evenly—distribute a common incentive pool among "team" members. Attempts to build more team-based compensation incentives have begun to appear for even that so-called bastion of pure individual capitalism: the direct sales force.

Because of its conventionally accepted value, teamwork—like such other workplace principles as diversity, employee engagement, and an ownership culture—is so strongly ingrained in business language that it rarely invites critical scrutiny. But before putting together a team-based compensation program, it’s important to explore precisely how and when teams create value. In our experience, compensation programs too often err in spreading the wealth evenly, whether it be raises or bonuses. While the stated rationale behind the design of these programs is usually the belief that teamwork drives results, or that the organization wants to encourage collegiality, the real reasons are often emotional and sometimes administrative.

In a recently published paper entitled "Idea Generation and the Quality of the Best Idea", Wharton professors Christian Terwiesch and Karl Ulrich argue that not only are individual contributions a more effective way to develop new products and innovative processes than through teams, but that group dynamics actually stifle creativity. In gathering evidence for this claim, they studied the ideas developed by two common “brainstorming” approaches: 1) a group working together as a team to develop ideas and 2) a scenario in which individuals work first alone and then together. What Terwiesch and Ulrich found was that groups employing the latter approach are able to generate more and better ideas, and can better discern their best ideas compared to teams that rely purely on group work. Their evidence also demonstrated as counterproductive the frequently recommended brainstorming technique of building on each other’s ideas; teams using this method neither create more ideas, nor are the ideas built on previous ones any better.

Is it possible that in the effort to encourage teamwork by designing compensation programs that spread the wealth we actually undermine the power of individual creativity, energy and initiative? Certainly, some practical issues favor a spread-the-wealth approach. Isolating individual performance, particularly if the evaluation is based on subjective criteria, costs more in terms of management time, increases legal risks, and is emotionally difficult for both giver and receiver of the evaluation. Furthermore, a strong current in corporate culture and social trends also seems to be encouraging a mentality of the collective over the individual. Who wants to vote against teamwork?

Before throwing out team-based incentives like so much bathwater, though, I think it’s important to preserve recognition of the baby in that bathwater: that in a complex business world it takes a team of individuals working in a coordinated fashion to accomplish almost anything of value. But scratch a team deep enough and you will find that it's individuals, not teams, who actually do work and create value. Certainly, team meetings are helpful in socializing and—notwithstanding the Wharton Study findings—even developing new ideas, and team skills are needed to create complex products and processes. But individual team leaders ensure that priorities are set and that individual contributions are brought to bear in a coordinated and effective manner. And, individuals must still contribute their own spark to team-based goals. In our experience, businesses err less on team-based incentive compensation as a concept than on spreading it too evenly in the interests of teamwork.

If you strongly believe in team-based compensation for a certain job or group of jobs, ask yourself exactly what you expect the team, working as a team, to do to create value and why you want to pay everyone the same. What you will probably find is that what you call teamwork is really a number of individuals successfully performing a task in a coordinated way. Then stop to consider whether you like team-based compensation because it is easier for the administrative, legal and emotional reasons cited above or whether you really believe you cannot sort out individual contributions from what the team is doing as a whole.

Ironically, when rewarding team performance, you are much more likely to create non-collegial behavior as, invariably, individuals who contribute more to the team feel they have been underpaid. We have found that, despite the difficulty and expense, rewarding individual performance results in more collegiality and greater productivity than sharing rewards.

So how does a business leader effectively balance the incentives for individual creativity, initiative and energy with ensuring that individuals contribute those same things to help other members of the team? Or the transparency and individual accountability that comes from individually-based incentive plans with the administrative ease of equally sharing team-based results?

Some general guidelines for incentive design that may be helpful.

First, unless you are using annual bonuses to manage your fixed costs, cut down on the number of jobs eligible for any type of incentive pay to only those that fit into one of the following categories:

• The job has shifting priorities from year-to-year that need to be emphasized through the bonus plan.
• The job requires the incumbent to set priorities and goals for subordinates.
• The incumbent has significant discretion as to how his or her job is performed.

Second, when incentive compensation is paid, emphasize and isolate individual contributions to the extent possible, even if you evaluate individual contribution as a contribution to a team effort.

• If the individual contribution can be identified numerically, base the reward on numerical contribution.
• If the individual contribution can be identified subjectively, base the reward on a subjective evaluation but clearly enumerate the subjective factors.
• If an individual is part of a team that is tasked with producing results, identify a team leader whose role is to divide up the incentive payments based on identified numerical or subjective factors.

Overall, identify jobs that should be rewarded with incentives, explore your assumptions about teamwork, isolate individual contribution whenever possible, and watch the positive change in employee performance.