Why most of the wrong things are done by good people? The dangers of excessive internal competition and a “winner-takes-all” performance evaluation system
Behavioral ethics series #8: creating successful companies attuned to the values and challenges of the 21st century
In the previous text, I showed how setting unrealistic or unidimensional goals is part of the pressures coming from the organizational context that may lead to ethical blindness.
In this article, I describe how promoting a climate of excessive internal competition reinforced by a “winner-takes-all” performance evaluation system is another channel through which the organizational context may engender unethical behaviors.
Many companies foster huge internal competition among their employees nowadays. For advocates of this idea, the pursuit of the best individual outcome would lead to both the survival of the fittest and the maximum economic efficiency for the company, emulating Adam Smith’s famous “invisible hand” for the economy.
Evidence shows, however, that fostering excessive internal competition is likely to lead to poorer performance as well as to increased unethical behavior, particularly when it elicits fear and anxiety.[i]
In the case of Wells Fargo, the bank created a competitive atmosphere by frequently ranking the performance of executives, branches, and regions. As detailed in a report about the scandal, these rankings circulated bank-wide. This created significant pressure to outperform peers as well as shaming those who fell short: “For many, this meant that selling more than your colleagues was a prerogative and failing to do so meant penalization, transfer and even termination.”[ii]
In the academic arena, an experiment told volunteers they would participate in a game with two distinct settings. The first was a “competitive” treatment, where individuals had to compete against each other for payment and only one person in each six-member group got paid. The second was a “noncompetitive” condition, where payment depended only on the individual’s own performance.[iii]
In the competitive situation, researchers observed that individuals cheated more, particularly those who were less capable of solving the task at hand. Thus, instead of getting participants to improve their performance in order to maximize earnings, the competitive situation simply encouraged them to cheat on others. Worse still, participants’ overall performance in the competitive modality was actually slightly inferior than in the noncompetitive condition.
In the business world, encouraging excessive competition through “carrots” such as status, promotions, or compensation has often been an invitation to poor long-term performance or wrongdoings. Frequently, this creates an environment in which people prioritize their short-term personal agendas and a culture of aggressiveness characterized by arrogance and hubris.
Another practice leading to excessive internal competition is the implementation of an evaluation system that categorizes employees as “successful” or “failed.”
This “winner-takes-all” arrangement provides disproportionate rewards to individuals ranked as top performers, while those considered low performers are weeded out or ostracized. This is very dangerous from the ethical standpoint, as it creates a toxic atmosphere of struggle for survival in which the success of a colleague often means your own individual failure.
One of the most striking examples of the pernicious effects of such a Darwinian environment comes from Enron, the US energy company that went bankrupt in 2001 and is still considered the most iconic corporate governance scandal in history. Its performance evaluation system, called performance review committee (PRC), aimed at releasing what Enron’s leaders believed to be people’s natural instinct for the “survival of the fittest.”
The PRC annually graded individuals from 1 to 5 based on the opinion of all the people they worked with (a 360-degree assessment). At the end of this harsh one-day process, the 10% to 15% people with the worst ratings (the low-performers) were required to be fired, while the top 10% received millionaire bonuses (the company used to buy several Ferraris that were given to the best assessed as part of their award).
The PRC became a flawed process. Aiming to be well-assessed, many executives began making deals with colleagues to get good grades and to jointly assign bad grades to teammates they disliked. Other managers, in turn, started to produce fictitious profits. It was worth everything not to be considered a “failure” in this system.
Instead of fostering meritocracy, therefore, Enron’s PRC created a workplace full or office politics with excessive internal competition, bordering on paranoia in some divisions. The company’s fate is known by everyone: It went bankrupt in 2001 after disclosing numerous illegal operations to inflate earnings so its executives could pocket millions in stock-option plans.
Enron’s PRC is a perfect example of the problems generated by Darwinian evaluation systems. To begin with, these systems usually fail to create a meritocratic environment. In fact, the opposite is often true: Because the results (for better or worse) of these one-off evaluation events are seen as decisive for everyone’s career, these systems tend to create a highly politicized workplace.
In addition, these winner-takes-all schemes create an internal atmosphere primarily characterized by fear and terrorism. To survive in this environment and not be considered a “loser,” people are induced to behave in ways that are extremely harmful to the company, such as obeying any requests from superiors without questioning, acting in conformity with the rest of the organization (even when they do not agree with certain practices), and being silent about ethical problems they see on a daily basis.
This has been well summarized by Professor David Mayer of University of Michigan, who argued that “If you let a winner-take-all mentality dominate your culture, it’s amazing what people become comfortable with in the name of competition.”[iv]
This outcome is particularly true for less competent executives. Because they know they will have a very small chance of succeeding by sticking to the rules, it is more likely that these individuals will be dishonest with colleagues, customers, and other stakeholders in order to avoid a “certain loss.”
A recent research corroborates this assertion. After conducting an experiment in which participants could make use of illegitimate tools to improve their results, researchers concluded that “poor performers significantly increase their cheating behavior under competition, which may be a face-saving strategy or an attempt to retain a chance of winning.”[v]
Despite producing serious side effects, Enron’s PRC is still a source of inspiration for many corporations. One example comes from the financial industry. After interviewing about 200 finance executives from the City of London, investigative journalist Joris Luyendijk observed that “Every year, prestigious top banks fire the worst-performing staff — no matter how much profit was made. It is called ‘the cull,’ the same term used when infected cattle have to be destroyed. Every six months everybody gets to evaluate their colleagues’ performance in 360-degree reviews.”[vi]
Luyendijk also notes that “A system like this makes office politics very important. You need to say hello to the right people at the right time. Team members are also in competition for a better ranking in the review. As you would expect, friends will give friends good reviews.”[vii]
Another example comes from Amazon, the world’s largest online retailer. In 2015, The New York Times talked to more than 100 of the company’s past and current executives to draw a picture of its culture.[viii]
One of the company’s practices is the “anytime feedback tool,” an appliance that allows employees to praise or criticize colleagues directly to management. All team members are ranked, and those who stay in the bottom should be fired every year.
This evaluation system has created a perverse incentive. According to the article, many executives said the device has become a space for intrigue and scheming. Some described making secret pacts with colleagues to bury the same person at once or to praise one another lavishly. Others, in turn, declared feeling sabotaged by negative comments from unidentified colleagues with whom they could not defend themselves.
During one of Amazon’s annual performance evaluation event, company managers said they were often forced to fire talented people in order to meet quotas established by the forced ranking system. One of the strategies adopted, according to the interviewees, was to choose a “sacrificial lamb” to protect more essential team members from dismissal. As one former marketing manager at Amazon reported: “You learn how to diplomatically throw people under the bus … It’s a horrible feeling.”
Instead of a winner-takes-all Darwinist system, leaders should focus on creating a culture that emphasizes solidarity, trust, cohesion, and cooperation among all employees.[ix] This is what creates long-term value for companies and makes them more productive, with lasting positive effects for society.
This view is corroborated by numerous scientific evidence showing that the ability to cooperate is the key factor for the evolutionary success of all kinds of human groupings (such as companies) and even of whole species such as ours.[x]
As attested by a group of experts in organizational behavior, “Designing systems to promote ethical behavior requires more than attending to the treatment of individuals in organizations. It may also require behaviors that appeal to our evolved tendency to lose ourselves in the process of sustaining a moral community capable of acting together as one.”[xi]
One of the leading references in this area of organizational behavior is Adam Grant, professor at Wharton University.[xii] His research with over 30,000 people across industries around different world cultures has shown that people can be classified into three groups: “givers,” “matchers,” and “takers.”
The first group collaborates with others without expecting immediate retribution (“what can I do for you?”). The second group is pragmatic and seeks to maintain an even balance between giving and taking (“what can one do for the other?”). The third group, in turn, is completely self-serving in its social interactions (“what can you do for me?”).[xiii]
After carrying out 38 studies with more than 3,600 work units worldwide, Grant observed that “givers” tend to appear more frequently among worst performers. This occurs because they spend a good deal of time helping others, which ultimately gives them less time to stand out individually.
Collectively, though, “givers” are essential because their personal sacrifice makes their organization better. According to Grant, there is a clear relationship between the frequency of giving behavior in a team or an organization and better performance in various metrics such as profitability, customer satisfaction, employee retention, and even lower operating expenses.[xiv]
Implementing winner-takes-all performance evaluation systems fosters an environment of greater individualism, which harms the “givers” and benefits the “takers” of the organization. The key to business success, according to Grant, is exactly the opposite: to create a culture where collaboration is the norm, “takers” are eliminated, and “givers” can thrive.[xv]
He argues that most organizations go in the wrong direction with respect to incentive systems because “the greatest untapped source of motivation is a sense of service to others; focusing on the contribution of our work to other people’s lives has the potential to make us more productive than thinking about helping ourselves.”[xvi]
To sum up:
§ Fostering a climate of excessive internal competition reinforced by a “winner-takes-all” performance evaluation system is the second pressure related to the organizational context that may lead to ethical blindness.
§ Evidence shows that promoting a culture of excessive internal competition through “carrots” such as status, promotions, or compensation tends to lead to poorer performance as well as to increased unethical behavior.
§ Implementing a “winner-takes-all” evaluation system that categorizes employees as “successful” or “failed” is another practice leading to excessive internal competition.
§ Winner-takes-all systems usually fail to create a meritocratic environment. In fact, the opposite is often true, as these systems tend to create workplaces where office politics are rampant.
§ Winner-takes-all schemes also create an internal atmosphere primarily characterized by fear and terrorism. To survive in this environment people are induced to behave in ways that are extremely harmful to the company from the business and ethical standpoints.
§ Instead of a winner-takes-all Darwinist system, leaders should focus on creating a culture that emphasizes solidarity, trust, cohesion, and cooperation among all employees. This is what creates long-term value for companies and its stakeholders.
Behavioral ethics series:
Prof. Dr. Alexandre Di Miceli is a professional speaker, business thinker and founder of Virtuous Company, a top management consultancy that provides cutting edge knowledge on corporate governance, ethical culture, leadership, diversity, and company purpose.
He is the author of “The Virtuous Barrel: How to Transform Corporate Scandals into Good Businesses” as well as of the best-selling books on corporate governance and business ethics in Brazil, including “Corporate Governance in Brazil and in the World”, “Behavioral Business Ethics: Solutions for Management in the 21st Century”, and “Corporate Governance: The Essentials for Leaders”.
He thanks Prof. Dr. Angela Donaggio for her valuable comments and suggestions.
[i] Steinhage, A. L., Cable, D., & Wardley, D. P. (2015). Winning Through Cheating or Creativity: How Emotions Influence Behavioral Choice in Competition. In Academy of Management Proceedings (1): 16796. Academy of Management.
[ii] Under pressure: Wells Fargo, misconduct, leadership and culture. January 2018. By Bharathy Premachandra and Azish Filabi. Page 9.
[iii] Schwieren, C., & Weichselbaumer, D. (2010). Does competition enhance performance or cheating? A laboratory experiment. Journal of Economic Psychology, 31(3), 241–253.
[iv] The Building Blocks of Business Ethics. 8/10/2015. Available at https://michiganross.umich.edu/alumni/dividend/fall2015/building-blocks-business-ethics .
[v] Schwieren and Weichselbaumer (2010: 241).
[vi] Luyendijk (2015: 88). Luyendijk, J. (2015). Swimming with Sharks: My Journey into the World of the Bankers (Vol. 4). Guardian Faber Publishing.
[vii] Luyendijk (2015: 88)
[ix] The focus on competition rather than on cooperation stems from a misunderstanding by many business leaders of Darwin’s concept of natural selection. Darwin sought to clarify his view on this issue in his book “The Descent of Man” by stating that: “A tribe including many members who, from possessing in a high degree the spirit of patriotism, fidelity, obedience, courage, and sympathy, were always ready to aid one another, and to sacrifice themselves for the common good, would be victorious over most other tribes; and this would be natural selection”. Source: Charles Darwin. The Descent of Man, 1871, chapter 5. Available at https://ebooks.adelaide.edu.au/d/darwin/charles/d22d/chapter5.html
[x] These scientific researches are summarized in the books by Nowak (2013), and by Nowak and Highfield (2011). Nowak, M. A. (Ed.). (2013). Evolution, games, and god. Harvard University Press. Nowak, M., & Highfield, R. (2011). Supercooperators: Altruism, evolution, and why we need each other to succeed. Simon and Schuster.
[xi] Kluver et al. (2014: 157). Kluver, J., Frazier, R., & Haidt, J. (2014). Behavioral Ethics for Homo economicus, Homo heuristicus, and Homo duplex. Organizational behavior and human decision processes, 123(2), 150–158.
[xii] This section was constructed based on Grant’s (2013) book as well as on his talk at the TED event “are you a giver or a taker?,” available at https://www.ted.com/talks/adam_grant_are_you_a_giver_or_a_taker
[xiii] After analyzing more than 30,000 people around the world, Grant found that 19% of people are “givers,” 25% “takers,” and 56% “matchers”. It is also worth noting that psychopaths are necessarily “takers,” although not all “takers” are necessarily psychopaths.
[xiv] The researcher also found that “givers” exhibit greater variability of individual performance, being more frequent among the individuals with better performance.
[xv] In his research, Grant noted that that the negative impact of a “taker” on a culture is usually double to triple the positive impact of a “giver”.