Most bonuses are a waste of time…

…and they may even work against you.  There is a received wisdom amongst the great and the good in business that everyone is ‘coin operated’ (usually because they themselves are particularly avaricious).  The majority of people at work simply want to do a good job, have good work mates in a company that is good to work for and offers advancement opportunities.  They are more concerned that they are not underpaid relative to others at their grade or level than being motivated to respond to ‘incentives’.

Image courtesy of Sunseeker

There are roles that perhaps should be remunerated by commission or bonus, invariably sales roles, but high rewards should only be offered where the ‘prominence’ of the sale role is higher than anything else in your marketing mix.  Paying high commissions or bonuses where the real demand comes from long built up brand reputation and advertising is simply inappropriate.

Paying lower than average basic, with high commissions or bonuses, simply because it lowers your breakeven point is not a sound enough reason in isolation; if the role doesn’t require it, don’t do it because it may work against you (and it won’t be your employees’ fault you’re in a recession).  If you do require this flexibility, then at least be honest about it and ensure that everyone shares in the upside when you have a good year, not just the board.  An end-of-year reward can be much more effective for morale than a bonus scheme that the average employee feels too remote from to influence.

There are however no rules.  Despite all the textbooks and articles and research and received wisdom, when you run your own business you can do what you want, providing it is legal and you can get your team to fall in line; it may work and it may not.  I have seen people who slavishly followed ‘best practice’ and failed miserably.  I have also seen business owners put into practice systems that were so far from accepted wisdom that I would have bet hard-earned money that they would fail – but they didn’t (at least not for a long time).  How can this be? My view is that it’s about the harmony that comes from all elements in a system being aligned and having the leadership that works.  Thus you can even have the most (seemingly) malign culture and systems but they can still produce results.

Whatever you are going to do in your business, whether incentives or no incentives, make sure that you have all of your systems, processes and policies all pulling in the same direction.  In one multinational I worked in, key elements of their remuneration and financial systems were actually mutually counter-productive and costing the business millions in excess working capital. When I graphically demonstrated this, they still wouldn’t change.  Why? In this instance, there were conflicting functional pressures that no-one wanted to acknowledge let alone address.

What I used to simply call the law of unintended consequences has now been dubbed ‘choice architecture’.  As the Israeli nursery (described in Nudge) discovered when they introduced a penalty for parents who turned up late to collect their kids, the lateness actually increased (the parents viewing what was a social problem as a financial one)!  And as the war on drugs has just been graphically demonstrated to show, your ‘programme’ may not actually work and, instead, you get vast collateral damage.

So, is it right that board directors keep increasing their own remuneration to ever greater multiples of the lowest paid?  Whatever you do with remuneration, make sure it really is for the right reasons (in a holistic sense), not just because you have it in your power to do so.

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4 responses to “Most bonuses are a waste of time…

  1. Very interesting point about companies that fail to follow best practice and still succeed. I’ve seen this at a big, American oil company that shall remain nameless. It seemed to work because the message from the very top was absolutely clear and consistent. Their policies may not have been fair or inclusive but they had the strength to stick to them and I put this down to the man at the top. It’s the same with best practice. If the voice at the top is firm and consistent, your policies will probably work. It’s when you have weak leadership and mixed messages that problems occur, imho.

  2. I agree entirely. Leadership is critical to the success of any business strategy or supporting tactics and policies whether benign or malign. I shall be addressing the subject of leadership in a future post

  3. The bonus culture is being rejected in some quarters. One of the “Big Four” consulting firms does not pay bonuses to it’s sub-partner ranks, preferring instead to compensate a full package that is very compelling as a ‘banker’ for want of a better term. Should I ever return to consulting, it would be a tempting proposition, entirely because I’d know that if I put in the effort, the rewards I’d get for doing more than just the day job, would be of a different kind. I could ditch a lot of the BS that goes with such roles where one spends hours and hours scrabbling for this and that to differentiate during “performance moderation” – a hateful concept if ever there was one – and focus instead on what it takes to be good at the role.
    So many places get this part of the comp process wrong, and I see yearly examples of discontent and disappointment because the performance and reward systems are arcane and badly managed.
    In fact I’d go so far as to say that the end result is less important than the process that leads up to it. If companies were better at the performance management and measurement process, the coin-op may become less of a factor.

  4. An interesting approach – so much effort can get wasted on ‘gaming’ the scheme. And as you say many schemes generate a great deal of dissatisfaction

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