I used to believe in bonuses. It seemed to make sense to pay for performance. If we made a manager’s pay partly dependent on achievement we would get greater achievement. Incentives work. Pretty obvious.
So we set up a sceme under which a significant part of a manager’s pay was at risk. That percentage increased as you moved up the tree and topped out at 30% for a general manager. One third of the bonus depended on total company results (against plan) and two thirds of achievement of the manager’s objectives.
So the first step was to negotiate those objectives. We had always done that – in theory – as part of the appraisal system but now it became pretty serious. Senior managers are good at haggling so in some cases the setting of objectives took weeks. How tough the objectives were depended on how tough the responsible manager was so some were soft and others hard.
The next problem was that over the year the business’s priorities changed. New product launches were postponed or added, advertising budgets cut and new customers acquired. Managers complained that this changed their objectives – it did – and wanted the bonus plan renegotiated. That took time from the real work of running the business.
Then there were the complaints that because one division had failed to deliver another could not meet its objectives and that was unfair.
All this discussion was carried out in a businesslike and civilized fashion. No furniture was thrown about. These were senior managers after all. But it did create a fairly significant distraction.
At the end of the year who got their bonus and who did not turned out to depend more on negotiating skill and luck than on performance. The part based on total company results also depended on luck - and inflation. These were the days of high inflation.
So few were happy, few were motivated and we could not see that the business’s results were improved by it all.
I don’t think this was not a one-off or due to poor management. Related companies tried the same thing with similar results. We tried variations over the years with not better outcomes.
It seemed to me that bonuses can work for a sales force – salespeople are fairly easily measured and tend to me motivated by simple goals. It also seems that something dependent on company results can be worthwhile. It helps concentrate minds on what everyone is working to achieve. But that is more like a reward or profit sharing scheme than an incentive plan.
Now I don’t know how it all works in banking. I suspect that there was so much money flowing than no-one begrudged part of the firehose being diverted. But I’ll bet that the bonus plans in government are managed – mismanaged – in a similar way to my experience. And I’ll bet that they just end up as a way of paying more without achieving on better result.
who got their bonus and who did not turned out to depend more on negotiating skill and luck than on performance.
Wow.
But it makes sense when you think about it.
daddy dave
11 Aug 10 at 10:32 am
Everybody gets their bonus in government Ken. It is a ‘you scratch my back, I’ll scratch yours’ system. It’s only taxpayers money and denying a bonus creates headaches you don’t need. As you say, probably a similar situation with the.banks – so much cash flying around there was no point fighting over any of it.
asf
11 Aug 10 at 12:01 pm
I totally agree. The number of occupations in which bonuses could be in any way scientific is limited. But I think the same goes with KPI fetishism in general. Good managers can recognise good performance and in the private system have a personal incentive to do so. Bad managers in the private system get weeded out in time.
In the public system I think the capacity for a successful bonus system is very limited and the proposal for school teachers is obviously crap.
pedro
11 Aug 10 at 12:26 pm
pedro – Where I ended up was to set a few priorities for managers, discuss progress during the year and then discuss accomplishments at the end of the year.
For senior managers it’s dopey to set specific measurable KPIs.
Dunno much about the education system, but I can understand the need to pay better teachers more. I have been told the the pay scale is pretty compressed and based on seniority so a teacher get to the top of the scale after a few years. Hardly motivating.
Ken Nielsen
11 Aug 10 at 12:37 pm
“I can understand the need to pay better teachers more.”
Me too, I just can’t work out how to do it in a centralised system. The teachers union is exactly correct when they point out the flaws in determining relative teacher performance by test results and such.
Your experience seems to match mine. You make sure people know what is expected in the job and then make a judgement based on personal observation of their results and performance.
pedro
11 Aug 10 at 12:48 pm
For senior managers it’s dopey to set specific measurable KPIs.
Really? Why? If there’s no use measuring their performance, then why do organisations need them?
Nothing wrong with incentives but they have to be based on fair and achievable goals, and I don’t think that the government has thought this policy through properly (which seems to be endemic in this government).
dorinny
11 Aug 10 at 1:07 pm
Sales commisions should only be paid out after the goods are paid for. This is not a problem in normal business dealings but for banks it is a real problem.
Paddy McGiuness had a story that when in New York during one of the Latin American crises, he asked a senoir banker if they didn’t have anyone around who remembered what happened the last time thet lent money to Argentina.
“Oh yes” said the bloke. ” We had a few of them. We got rid of them because they were bad for bueiness”.
Rodney
11 Aug 10 at 2:52 pm
How on earth can anyone support a bonus system when the teachers unions are sitting in the middle of it and the government sees them as part of their constituency?
Why not offer inducement to the kids rather than the teachers in the form of scholarships etc.
We’ve had a bonus system of sorts in the past. They were called scholarships and they did did match performance with compensation.. The kids who deserved it got it.
JC
11 Aug 10 at 2:56 pm
It’s easy enough, in a not-for-profit sector, to cook the books on KPIs, or to divert all available resources to meeting KPIs, and neglecting anything and everything that isn’t measured.
THR
11 Aug 10 at 2:58 pm
Exactly correct THR.
“For senior managers it’s dopey to set specific measurable KPIs.
Really? Why? If there’s no use measuring their performance, then why do organisations need them?”
The point being made is that such KPIs do not really exist. Performance at most levels in a business is very dependent on others and outside influences, yet anyone actually at work is likely to have a fair idea of who contributes and who doesn’t.
In the legal profession the easiest KPI is billable hours, yet people who work slowly or inefficiently kill your client relationships because clients can’t see the value in the work being done.
pedro
11 Aug 10 at 3:06 pm
dorinny: With senior management, the problem is this. They can’t be expected to just spit out the result set out in the plan at the start of the year. Take the person in charge of manufacturing. He or she is responsible to produce the volumes and product mis required by the sales forecast at the cost in the budget. But the sales forecast changes all the time, changing the volumes, the product mix and costs. Imagine the poor bugger responsible for manufacturing the hybrid Camry in Melbourne. It looks like selling about half the plan. Can he or she be held to the KPIs set at the start of the year?
The job of a senior manager in most businesses it to handle what is thrown at him or her. Kind of the business equivalent of Harold Macmillan’s “events”.
Quantified measurements are possibly possible but usually not worth the trouble.
Ken Nielsen
11 Aug 10 at 3:30 pm
Ken, Pedro, THR, thank you for your explanations
Makes a whole lot of sense – but then, on what basis should bonuses be given to senior managers? I guess that is the $100,000 question….
dorinny
11 Aug 10 at 3:51 pm
dorinny If I was running a business today, if the competitive situation allowed, I’d pay top salaries, no bonuses and remove managers who did not perform. They would understand what is expected even if it could not be quantified. How well they handle “events” would be a large part of it.
Ken Nielsen
11 Aug 10 at 4:02 pm
I think bonuses should be paid when profits allow it or extra special performance justifies it. A scientific bonus system could easily create perverse incentives.
pedro
11 Aug 10 at 4:12 pm
Ken, I think I would do the same. And I also agree with Pedro – a bonus at the end of the year in recognition of extra special performance just seems a lot more rewarding, fair and effective. But this probably wont be as practical in large corporations where it might be hard to recognise individual achievements or excellence.
dorinny
11 Aug 10 at 5:04 pm