How to make your rewards effective not efficient
Is it time to take a fresh think on bonus culture?
Why do we persist in continuing with old reward systems that not only do not produce the desired effect but also quite often produce the opposite effect that we are trying to achieve – motivate our staff to achieve their goals?
Research programmes have shown that rewards are useful when applied to routine (right brain) tasks but can be counter-productive when (left brain) tasks are involved. There has to be a better way to design a reward system that is not only beneficial to the organisation but also recognises and reinforces the appropriate behaviours and performance within our staff. This article looks at why traditional programmes fail and what the research suggests organisations can do to make them more impactful.
The Law of Unintended Consequences
A number of years ago, a client in a seasonal food business approached me with a dilemma.
He had hired a manager to oversee his packing and warehouse operations. The challenge he presented was that, since the manager had joined, quality had gone down quite significantly. Given that quality was one of the businesses USPs, this was a significant issue for him. I was approached on the basis that we would need to exit this manager who 'obviously wasn't working out’. However, after a little bit of exploration, it became clear that the issue wasn't solely with the manager but what was expected of him.
As in all such businesses, controlling labour costs is an important part of the difference between profit and loss. When the manager was taken on, he was incentivised with a percentage of the savings relating to reductions in overtime and weekend work. When queried, my client agreed that savings had definitely been made in this area. The problem was that the manager was incentivised on one thing only – labour costs. It was in his interest to get things done quickly. Any additional labour intensive tasks, such as quality checks, went out the window as these took time. Why did an experienced manager ignore quality when it was a core part of the business success? Because he had been incentivised to ignore anything that cost extra. Far from acting irrationally, as my client thought, the manager was acting totally rationally - it was in his self-interest to let quality slide. My client had suffered from the Law of Unintended Consequences.
Design of Incentive Schemes
The design of an Incentive Scheme is of vital importance and must be given careful attention by the Organisation.
The Chartered Institute of Personnel & Development (CIPD) 5 set out 8 key principles that organisations should take into account when designing Executive Remuneration programmes. These include:
- The design of remuneration plans should be clear, appropriately simple and relevant.
- The mix of fixed and variable remuneration … should not lead to inappropriate risk-taking … such as revenue growth to the detriment of profit
- Variable elements of the remuneration package should ensure that the value of the package will vary with business performance
- Incentives should reward outcomes that lead to, and reflect, sustainable and measurable value creation.
- Remuneration Committees should seek to understand the potential cost of remuneration arrangements over the short, medium and long term.
Challenges When Introducing Incentive Schemes
The introduction of Incentive Schemes must be done with great care.
As with any change programme (and this is a change programme), the introduction of Incentive Schemes send a message both to those who receive the Incentive as well as those who are not included in the scheme.
Many organisations do not take into account the impact upon culture of such schemes and suffer from the ‘Law of Unintended Consequences’
Some of the challenges of a bonus culture include:
- The focus of performance solely on those goals leading to additional compensation (ignoring goals linked to an already received salary)
- An over focus on short term results (as seen during the Financial Crisis) despite the long-term damage to the business of such decisions
- The danger that they can become considered ‘guaranteed’ over time and lose the ability to drive over-performance.
Questions that a business needs to be ask when looking at introducing such a programme include:
- Why are we introducing the bonus scheme and why now?
- What change in focus, behaviour or activity are we trying to bring about in the business?
- What message are we sending about the performance of those whom we are targeting?
- What message are we sending to those whom will not get the bonus?
- Can we achieve the same outcomes without introducing a bonus scheme?
- Are all stakeholders (employee, shareholder etc.) needs being met through the scheme?
A software client was struggling on a number of fronts; client projects were late, staff turnover was up and engagement was at an all time low. We set up a series of staff focus groups that pointed to a number of problems; the bonus culture at the top of the list. It was seen as divisive and drove inappropriate behaviours including sabotage of other projects and withholding or delaying staff transfers. It became critical that this issue was tackled head on before things got worse.
Starting from scratch, the company established a set of principles, based on fairness, that all managers were asked to sign up to. Company wide communications took place before roll out highlighting that the changes made were based on staff feedback. 12 months later, staff turnover was down and client delivery had significantly improved. While not all improvements were based on the changes to the bonus programme, it was clear that they played a critical element.
When introduced properly and focussed on the right issues, incentives have a role to play.
However, if not introduced carefully or focused incorrectly, incentives can have a detrimental impact on employee motivation without any impact upon organisation performance. They are not a replacement for good management. The organisation should ensure that it has clearly articulated its strategy as well as the goals, targets and expectations for each team within the business and demonstrating how they all contribute to the whole. Without this, the organisation could be spending on bonuses with little or no return.
About the author
Shane Twomey is an Organisational Design specialist with over 25 years experience in assisting organisations align their organisation capabilities, structures and people to match their strategic needs.
He can be contacted at www.organisationdynamics.ie
- Drive, the surprising truth about what motivates us, Daniel H Pink, Riverhead Books, 2009
- Bonuses don’t matter … in a high-performance organisation, André de Waal, Compensation and Benefits Review, Vol 44 No 3, May/June 2012. Pp 145-148.
- Towers Watson 2010 Global Workforce Study – Global
- Source: Corporate Leadership Council 2004 Employee Engagement Survey
- The CIPD Principles of executive remuneration, CIPD, February 2010
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