Stop Rewarding Good Leadership
With employee turnover at record highs, the need for strong leadership has never been greater. Cultivating it effectively requires embracing a paradox: leadership skills needs to be measured, but not rewarded—at least, not the usual way.
In 1977, the founder of The Boston Consulting Group Bruce Henderson published a cautionary tale.
“The Story of Joe (A Fable)” tracked the journey of an imaginary, well-intentioned but ultimately hapless manager. “Joe” became a company star by turning money-losing divisions into modestly profitable ones, yet still ended up getting fired. Why? Because his method was to slash costs, sell off assets, and kill investment projects without considering the long-term consequences. The result: short-term upticks that quickly soured, leaving disaster in their wake.
Henderson argued the company was as much to blame as Joe. He was only optimizing what was, on paper, valued—doing “the wrong thing for the right reason.” The moral: even well-meaning managers can do harm if assessed by the wrong metrics.
Almost half a century later, this pattern endures, though its locus has shifted. General management sophistication around financial measures has improved dramatically —while pockets of short termism remain, senior leaders have become better at making sure front-line managers are not harming their organizations by ignoring risk and undermining growth or future profitability. But a new blind spot has emerged — paradoxically, given companies’ decades-long focus on “The War for Talent,” around people.
People Metrics Aren’t Working
In the last decade, turnover among US non-farm employers has increased dramatically, from less than 39 percent to over 48 percent. Employee engagement has risen over the same period — but still languishes, globally, at a dismal 23 percent, according to Gallup’s annual State of the Global Workplace Survey. A survey by the UK coupon-clipping service Vouchercloud suggests the average employee is now productive less than three hours a day.
Economists attribute much of this employees’ new-found taste for job hopping to the pandemic. Millions have discovered that switching employers is less difficult and more beneficial than they’d previously appreciated.
Yet while the frequency of such moves has increased, the reasons for making them have remained remarkably consistent. As the old saw goes, employees join companies and quit bosses. Now that they’re quitting their bosses in record numbers, companies have more reason than ever to help managers at all levels raise their game.
In this light, companies have begun to add “people metrics” to managers’ goals. This is perhaps most often manifested in increasingly ubiquitous employee engagement surveys such Gallup’s long-running Q12 survey, which tracks twelve dimensions of the employee experience found to be correlated with engagement and productivity.
According to Gallup, the wrong candidate is promoted or hired into management positions 82 percent of the time.
This solution comes with its own challenges, however. It’s one thing to suggest, as do employee experience leaders like Marriott International — recently named as one of Forbes’s top ten Best Companies to Work For for the first time in its hundred-year history— that everyone who can inspire by example or education may be considered a leader. But the leadership skills that convert to good people management are rarer than this would suggest. According to Gallup, companies fail to hire or promote the right candidate 82 percent of the time. Employment site Career Builder believes roughly a quarter of managers are promoted without proper qualifications or aspirations: they would be better suited, by skill and disposition, to roles as advisors or subject-matter specialists. As weak engagement statistics indicate, the resulting harm goes far beyond the misery of managers working beyond their comfort and capabilities.
Some employers have been quicker than others to recognize and respond to this reality. In 2023, Shopify announced that it was now parsing employees into two career tracks: on the one hand, “managers,” who have capability and interest in managing people, and on the other, “crafters,” who simply want to produce great, non-people deliverables.
Managers Are Not (Necessarily) Leaders
Within the management stream, however, there remains another distinction to be made. In his 1989 classic, On Becoming a Leader, USC management guru Warren Bennis saw “managers” and “leaders” as exemplifying two different competencies. The former focused on helping teams achieve specific deliverables, optimizing systems and structures. The latter focused on people, inspiring discretionary effort and fostering long term talent development.
Managers focus on deliverables. Leaders focus on people.
These are not exclusive skill sets. Managers need to lead and leaders need to manage. The distinction is one of focus, as may be helpfully illustrated with this matrix:
The question for companies keen to avoid another “Joe” situation is how to guide and incentivize these two streams appropriately. As Shopify has found with managers and crafters, it cannot be the same.
The Path to Better Motivation
A helpful clue may be found in author Dan Pink’s distinction between intrinsic and extrinsic reward systems. In Drive: The Surprising Truth About What Motivates Us (2009), Pink aligns these with two kinds of work: algorithmic work, whereby good output is relatively invariable in nature, produced by applying certain rules, and heuristic work, where more creativity and learning is required, and various outcomes might be considered acceptable.
It would be trite to suggest that management and leadership might fall neatly into these boxes. Yet it’s not inaccurate to suggest that the former tends to be significantly more algorithmic in nature, and the latter more heuristic. Therein lies a clue as to how to guide those tasked with each into superior performance.
Intrinsic rewards like skill development are typically more motivating than compensation or even promotion.
An important insight in HR circles since the early 90s, noted by Pink and others, is this. Not all performance tracking needs to connect directly to compensation — and indeed sometimes this can be actively harmful. Why? Because in most roles in the workplace, particularly in senior and white-collar settings, intrinsic rewards — that is, feeling rewarded by the work itself , including the development of one’s own skills — turns out to be inherently more motivating than extrinsic rewards, such as compensation and promotion.
Measurement Helps Development But Can Hurt Performance
Powerful evidence for why this should be so comes from a surprising place: the world of grade school education.
A 2018 study found that “high-stakes testing” tended to increase anxiety and reduce performance among students. This is not to say that performance measurement is harmful, per se. On the contrary, what gets measured — whether we’re talking losing weight or running faster marathons — gets improved. Students tend to love practice tests, which help them figure out what they’ve grasped and where they need to improve. Where they get skittish is when they know a test is going to count towards their final grade.
Students love practice tests they can learn from. Performance goes down when it counts toward their grade.
The trick for the leaders and managers of managers and leaders thus comes down to how measurements are used. As historian Jerry Muller points out in The Tyranny of Metrics (2018), many in the workplace find themselves contorting their behavior into bizarre and even unproductive acts in order to score well on metrics whose unintended consequences are not fully understood . As economist Alex Tabarrok has pointed out, when a simpler system tries to regulate more complex ones, unintended consequences are the all but inevitable result. No surprise then, that leadership teams seeking to regulate entire businesses often find themselves unpleasantly surprised.
Management, in Bennis’s construct, is relatively simple: it’s about the direction and coordination of effort in a given period. Leadership, which concerns itself with inspiring additional effort and developing talent over time, is not. It thus makes little sense to measure individuals required to produce some degree of both by the same stick.
Many employers are replacing engagement surveys with leadership assessments.
Recent years have seen many employers abandon the classic employee engagement survey in favor of more focused leadership competency assessment — that is, focusing on measuring less the desired outcomes (engaged employees) than the drivers of that outcome (strong leadership).
But what to do with the results? Should a leadership competency score be made part of a manager’s performance scorecard, and thus his or her compensation? Will that lead to better leadership?
Like nervous high school students looking to get into a good college, the answer is often no. As leadership competency models like the popular Leadership Circle clearly demonstrate, the qualities that make a good leader vary with function. The head of an accounting team needs to excel at applying rules, for example, whereas the head of a creative team needs to excel at breaking them. While engineers and process managers seek Six Sigma perfection, strategists and business development executives must cultivate what BCG calls “a tolerance for ambiguity.” Moreover, as HR leader Lindsay Osmond points out, the requirement for inspiration and development-over-task focus tends to increase in an organization by level of seniority — the role of a C-level leader is inherently more generative than a line manager, who needs to prioritize other business deliverables.
Leadership assessments tend to be subjective, and can often be counterproductive.
It may make sense to measure the performance of front-line “managers” by specific people goals — engagement-driving factors like job satisfaction and loyalty. The same cannot be said for mid-level “manager-leaders” who have aspirations to one day join the ranks of senior leadership. Leadership measures may be helpful, even essential features on the latter’s personal dashboards, so that they can understand their strengths and development areas. These remain notoriously subjective in nature, however. They are often based on self-assessment and 360 reviews, both of which can become distorted, politicized, and even counterproductive if built directly into compensation and career progress systems.
The Right Way to Reward Weak Leadership
The logical corollary of rewarding leadership strengths with bonuses and career progression is penalizing perceived or possible weakness. This discourages candor and encourages gaming. It makes more sense to consequence struggles with something else: leadership development support, such as mentorship, executive coaching, and training.
Maturing leadership skill is a core function of every company.
As all HR/HCM managers know, talent is a rare and valuable commodity. Leadership talent is even more valuable and hard to find—a complex of soft and hard skills that’s present in raw form in only about 10 percent of the workforce, according to Gallup, which needs additional guidance and experience to develop to maturity. Rarely does it spring fully formed from the ranks or a hiring pool. It is a core function of every company to develop it. This requires measurement, but also a tolerance for and even encouragement of failure, as a natural and essential part of learning.
If you want managers to build leadership skills, don’t pay them for it.
Accordingly, while tracking the development of people leadership skills makes sense at all levels of an organization, integrating these into a total rewards system does not.
The takeaway is this. Pay managers and aspiring leaders, of course, for helping their teams achieve specific financial and other business goals. If you truly want to help the latter build their leadership skills, however—as every company with more than a handful of people should—don’t pay them for it.
Let development be its own reward. Let them grow along their own individualize path. Let the organization reap the benefits over the long term.
“Before you are a leader,” said legendary Chrysler CEO Jack Welch, “success is all about growing yourself. When you become a leader, success is all about growing others.”
A core duty of any leader is nurturing those that will one day step into your shoes. Support their learning however you can—and don’t let a failure- and learning-phobic incentive system get in the way.
Stephen Butler is a partner at Framework, a management consultancy. Thanks to Lindsay Osmond for contributing to this article.