As he grew older, Douglas became more and more disturbed by the negative attributions his father ascribed to the unemployed and homeless (that they’re shiftless and lazy, etc., much the same as what some say today). The younger McGregor would argue with his father that the poor were no different from others, they were simply down on their luck and the victims of a dismal economy.

Eventually his dispute with his father evolved into McGregor’s famous articulation of Theory X and Theory Y.

Leading with the assumption that people dislike work and that they will do anything to avoid it is known as Theory X. Looking beyond these assumptions is Theory Y. When does Theory Y take effect? And when it does, how do we adapt our systems, in particular those associated to performance and appraisal?

Below is the wisdom of McGregor, Maslow, Daniel Pink, Peter Scholtes and Tom DeMarco on the subject, and my fallible attempt to put it all together.

1. There are 2 types of work: heuristic and algorithmic

  • Algorithmic is mechanical work. It follows a series of established steps. Linking these to external rewards is ok, since people have little inherent motivation to do this form of work.
  • Heuristic, on the other hand, is creative work. Tying “if-then” rewards, i.e. carrots and sticks, to this type of work is dangerous.

Ref: Drive, Chapter 1. Daniel Pink

2. Heuristic work should not be tied to “if-then” rewards

  • “If-then” rewards narrow thinking and limit creativity. People find the fastest way to an end and go no further. When the reward is removed, people stop doing the work.

Ref: Drive, Chapter 2. Daniel Pink

3. The greatest sources of motivation are intrinsic

  • People are intrinsically motivated to achieve higher purpose (mastery, autonomy, self-actualisation). Higher motivation is not pursued unless lower needs are met, many of which are derived from pay, e.g. safety, living and physiological needs.

Ref: Maslow’s Hierarchy

4. Withholding pay may prevent people from achieving purpose and mastery

  • Linking pay to outputs of a higher order of motivation, e.g. self-actualization, can create a cyclical deadlock, where one must be attained to unlock the other.

5. Pay cannot motivate, but pay that is perceived to be unfair can demotivate

  • Pay should be internally and externally fair.
  • We should try to take the issue of money off the table.
  • Pay above the market average.

Ref: The Leader's Handbook, Chapter 9. Peter Scholtes, Drive, The Zen of Compensation: Paying People the Type I Way. Daniel Pink

6. Differentiating individuals within a team is likely to create competition and obstruct peer-coaching

Management actions that may result in internal competition:

  • Annual salary or merit reviews
  • Management by objectives (MBO)
  • Praise of certain workers for extraordinary accomplishment
  • Awards, prizes, bonuses tied to performance
  • Performance measurement in almost any form

Ref: Peopleware, Chatper 25. Tom DeMarco

7. We should seek to replace “if-then” rewards with “now-that” rewards and intangibles

  • “Now-that” rewards are unexpected and awarded only after a task is complete.
  • People trained on extrinsic motivation can be retrained using “now-that” rewards.
  • Intangibles can be positive feedback or growth opportunities.

Keep in mind that repeated “now-that” rewards can quickly transform back into “if-then” rewards.

Ref: Drive, Chapter 2A. Daniel Pink

8. Intangibles may outweigh tangibles when it comes to retaining people

  • Tangibles are salary, bonus, benefits etc. Intangibles are challenge, trust, safety, pride and joy in work.
  • Intangibles have greater influence in retaining people who are attracting offers from other organisations.

Ref: The Leader's Handbook, Chapter 9. Peter Scholtes