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.
