From the Ask Tom mailbag:
In response to my discussions over the past few days with Reggie over incentive (bonus) compensation.
Question:
I understand in this situation that the Manager specifically stated that he was holding back compensation and distributing it as bonuses because he did not trust his people to stay motivated, but is it your belief that bonuses are typically a bad idea. My work is strictly commission, payment for outcomes, and from what I’ve read, this is one of the best compensation systems so that you stay real in your work and don’t become complacent. It keeps me in touch with the results that I aim to achieve and prevents me from hitting a ceiling on my earnings. While I was salaried, I was probably still one of the highest achievers, but I bet I work even harder now. What do you think?
Response:
Most incentive, or bonus systems create distrust, as Reggie is experiencing. Reggie would attempt to describe the system in more positive terms, like a reward for “extra” effort, but the net effect is still the same. It violates the contract that a person would give their best effort every day.
That being said, there are circumstances where people are genuinely motivated by compensation “at risk.” You do not want to see a cap on your earnings. You have the entrepreneurial spirit and are willing to take your lumps by your results even when things don’t pan out. Sales roles and the people in those roles are often in this circumstance. I see this relationship, not as a W-2 employee under a destructive, manipulated bonus plan, but as a 1099 independent contractor who truly wants to live at risk. This risk and this relationship is perfectly appropriate for this circumstance.
Let’s hear your thoughts. -TF
IMHO, being totally on incentives is closer to “owning a business” than “being on a job”. Thus, the comparisons dont apply.
The guy is working harder now becuase he can visualize a direct correlation between his effort and his income.
It seems to me that one among many things that is crucial in the “owning a business” vs “being on a job” compensation plans is the ability to control matters that affect your outcomes. In many instances I have seen there is an inherent conflict because the compensator has control over matters that affect the compensatee’s ability to create and influence the outcomes favorably. That matter of control typically creates a misalignment. Which brings in the other factor that I have seen come into play in that the unintended results of the bonus system can have a corrosive effect in many ways.