The furor over the A.I.G. (and soon bailed-out bank) bonuses have dominated the headlines over the last few days. What’s more, Washington’s favorite activity- “the blame game” is in full swing. It might be entertaining, if it wasn’t so infuriating, and avoidable.
The root cause of the problem lies in the design of the bonus plan in the first place. In the case of A.I.G., flawed logic led to flawed design, i.e. “we must retain the people who ran the car into the ditch, so that we can figure out how to get it out.” But less egregious examples of flawed logic and therefore design happens every day in many companies.
The biggest mistake lies in the area of target setting. Many organizations set soft, or no targets at all, instead opting to pay for amorphous “objectives” established through a diffuse approach traditionally called management by objectives (MBO). The problems arise when the objectives have little or nothing to do with the operating plan target for the business. The process of driving this alignment is not at all complicated, but it is difficult.
As I have advised clients in the past, if employees activities (and ultimately their compensation) are not aligned to key operating targets, you do not have an operating “plan,” you have an operating “hope.” But through a disciplined approach to performance management, you can ensure that your precious compensation dollars are being wisely spent and you can avoid the potential embarrassment of your own “bonus beat-down.” Watch future posts for how to make it happen.
Matt,
I agree a bonus is a reward for meeting set targets. Bonus plans should not be in a contract if they are not tied directly to meeting objectives. One other way to think of it, a sales person doesn’t get a commission for “almost” making a sale.
Objectives should be fluid throughout the course of the year to reflect the changes in the business climate.
Matt,
Setting a strategic vision, identifying the key strategic actions to acheive your vision in an Operating Plan, and then establishing incentive based-performance objectives directly linked to the achivement/progress towards those strategic objectives is a proven formula for success.
Always “keep score”, as what gets measured and aligned with incentives has a very high probability of getting accomplished.
It is a great foundation for any business and most people enjoy working much more in a performance based culture.
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