Bonus and Behaviour

A quick post inspired by some long chats with the clever Mrs Bozo who is, as you may know a guru about all matters "reward".

Of course it make sense to have a portion (there are arguments about how big a portion - which tends to vary accorind to the seniority of people and the magnitude of their total reward) of everyone's package being incentive based.

But there is one obvious fact.

Cash NOW as a reward for results NOW is flawed. It creates bad behaviour NOW!

Let me give you the example of the car manufacturer or the electronics manufacturer.

Sales are huge! Bonuses are huge. People leave and go backpacking for three years with their massive cash rewards.

Next year, returns of faulty goods are huge! Losses are huge! None of the people responsible are even still employed by the company.

Ah well. Its only the shareholders and the customers who got screwed!

I specifically avoided the investment banking example.

But NPV and mark-to-market have been shot to pieces (surely?) by the bonuses paid to our friend Joe at AIG who got paid for making short term profits on the assets that brought the entire company down. AIG dead, Joe a multi-millionaire. Flawed. We surely don't need to mention that 'mark-to-market' was the beginning of the end for Enron!

Incentives = good ~ cash now = bad

Future vesting equity = unpopular with high earners.

But surely unpopular = tough titty?

Can we try, just a little bit, to engage employees with our vision for the company? Engage them with the idea that our company does something special and has a long term plan? Engage them with values that are not just money?

because if we can we can incentivise hem in creative ways that will drive better behaviour and better behaviour will drive better long term corporate performance. Honest!

Comments

[Bozo's antagonist]

Woww. Cash as a reward for results is flawed you say? Next time you get paid for doing something, you keep the 'Thanks' and pass me the cash. Deal?

I know the point you're making in relation to bank bonuses. With all the crazy financial derivatives it's possible for both sides of a zero-sum transaction to be claiming profits and upside. One side is lying, possibly both, but they all get bonuses on reported gains. But the problem here is not around rewarding success, it's about rewarding people whether real success is achieved or not, which is a different problem - and is a very real problem in banking.

In the real world (not banking) of electronics and cars, the problems you raise don't really happen on the scale you suggest.

Paying cash rewards for real results makes perfect sense.