Out-of-Whack Bonuses Give an Entire Industry a Black Eye

Do bonuses have a place in a modern compensation and benefits structure? Yes, they do. Let the record show I am not unequivocally opposed to bonus programs, though I do often write about the downsides.

But bonuses can have a place under certain conditions and with certain constraints and conditions. I propose those to be (at least):

Bonus Conditions:

• Like all incentives, bonuses can only be earned if clearly understood, pre-existing achievements are met.
• These achievements cannot violate company values, put company profits ahead of customer best interests, or put the company or its reputation at risk

Bonus Constraints:

• Bonuses are never a “guaranteed” part of a pay package that employees can come to expect or rely on.
• Most importantly, bonuses cannot be of large enough value to drive “cheating” behaviors, especially to the extent these behaviors become acceptable across an entire industry!

Why such emphasis on this last point? Recent research reported on NBCNews.com showed:

“Nearly one-fourth of financial services professionals feel it’s at least sometimes necessary to do illegal or unethical things to be successful, and many are motivated to do so by fat bonuses and other compensation.

“That’s according to a new survey of 500 U.S. and British fund managers, bankers, asset managers and other financial services professionals. It was conducted in June on behalf of the law firm Labaton Sucharow, which specializes in whistleblower cases. …

“The motivation to cheat: For many, it’s the money.  

“The survey found that 30 percent of those in financial services feel pressure to do things that are unethical or illegal because of their compensation or bonus plans.”

This is the “law of unintended consequences” writ large. I’ve referenced this idea before in a common example of a call center where employee incentives are often based on how many calls are completed, not on how well the customer was served on those calls. Dilbert ran a brilliant cartoon that illustrated this point better than I can ever explain it in words.

Pile this bad news on top of the Greg Smith resignation from Goldman Sachs published in The New York Times, and the end result is an entire industry with one very large black eye. And this is an industry that can ill afford any more poor publicity.

How do you structure effective, non-destructive bonus programs? What constraints or conditions would you add to my list?

As Globoforce’s Head of Strategic Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. His articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.

Comments

[Charles]

Good, quick article. I think you've hit the conditions and constraints on the head. Without them, the bonus program seems to quite often turn into an entitlement rather than a tool to achieve results.

One thing to add would be accountability. We have quite a few employees who may result to cheating-like behavior, but since we aren't able to hold the leaders accountable to govern the bonus plan as it was designed, the unintentional behaviors are almost encouraged to grow.

A pay-for-performance bonus plan isn't really "pay-for-performance" if you are also willing to "pay-for-their-smile."

[E. James (Jim) Brennan]

Re the comment by Charles... maybe the "performance" output desired is really just the smile. The second problem with incentive bonuses is that you might only get the outcome you reinforce.

Undesirable behaviors that are rewarded tend to endure and persist until they can become almost impossible to extinguish. Moral hazard exists in many situations, but it is easiest to pillory the bad examples found in compensation packages that are publicly disclosed. They are so obvious that they attract all the attention, despite even worse situations hidden from open view.

[John A Bushfield]

Derek - The criteria you enumerated are spot on, and the industry example you provided drives the point. Unlike most other industries, Wall Street is driven by money, and only money; they produce no product, add no lasting value, have no real accountability, and receive obscene amounts of money, most of it in the form of 'bonuses' earned for who knows what.

I'm a strong believer in variable comp, and would like to see it used more universally. Crisply defined, clearly understood, and well managed, incentive bonus' can focus behaviors towards accomplishing articulated goals. Equally, if not more important, it forces management to think about what they want their people to do, making their efforts more efficient and productive, leading to better outcomes. Compensation professionals make a significant contribution to the business by understanding what the company is trying to accomplish and then designing monetary tools to help achieve desired results. It's a win-win scenario, which is the best kind!

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