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07/25/2012

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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."

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.

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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