Last week, based on a number of conversations I had with Reggie, we started a heated debate about incentives and bonus compensation. Reggie’s experience had backfired on him.

“So, tell me Reggie, what exactly were you trying to accomplish with the bonus system? Because that is where we have start our discussion. What was the purpose?” I asked.

“The purpose, well, you know. I want my managers to stay focused, to have the company’s best interest at heart, to take that one more phone call before going home,” Reggie replied.

“And how did you communicate this to each of your managers?”

“Well, once a year, we sit down and look at their job. We break it down into Key Result Areas, then create a goal in each area, for the year. We attach dollars to each of the goals, to be paid quarterly. We are doing it just the way our consultant told us to do it.”

“And what are the results?”

“It’s all over the board. Two managers made most of their KRAs, but I don’t think they did anything special, it just happened. Three other managers did some suspect things to manipulate the numbers into the last quarter, so they got their bonus, but, they didn’t really achieve the goal, it just looked like it. And two other managers, well, they missed their targets, in fact, they quit trying about halfway through the quarter.” Reggie stopped. He didn’t like his own expert opinion on this.

“So, by your assessment, the bonus program achieved results in two cases, but you figure those results would have occurred with or without a bonus program. And in five other cases, the bonus program created manipulation or became a disincentive to performance,” I restated.

“Yes, that’s it. So, you tell me. What could we do differently to get the behaviors we want that drive the results that we want?”

The past few days discussion on the impact of bonuses has stirred quite a bit of email and posted comments.

Bonus systems are seductive for both the manager and the direct report. They sound great when times are good, the manager can relax accountability efforts (seduced by the good times). But when times are not so good, things turn sour.

It all comes back to the contract. As a manager, I expect my team members to do their best every day. In exchange, they can count on consistent fair compensation.

The last email I received posed this simple question. “What type of incentive program would you recommend over a bonus program?”

It’s a sucker punch question. Incentives hearken back to the carrot and stick. Incentives and bonuses create distrust and the circumstance for manipulation. Incentives and bonuses say “I do not trust you to do your best.”

So, what type of incentive program? It’s the incentive program of trust. Next week, we will talk about its elements, and how a manager has real influence in the areas of motivation and performance. Rather than just throwing money at it. -TF

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

Reggie looked at me sideways. “Do you mean that this whole complicated issue regarding incentive compensation, that we hired expensive consultants to help us with, may be a guided misadventure?”

“You tell me,” I replied. “What type of environment do you create when you tell people that you are holding back part of their compensation because you don’t trust them to do their best?”

“You just said it, it creates an environment of distrust,” Reggie declared.

“And what kind of behavior does this distrust create?”

“Whooo! It’s all over the board. Some people work really hard, appear very dedicated and some people try to figure out how to manipulate the system to their advantage. I don’t know. Come to think of it, the people who seem committed, who perform the best, are the kind of people who would work very diligently even without the bonus.”

“And would you describe those people as stupid for working so hard without having a bonus as a carrot?”

Reggie shook his head. “No. I would have to say that is just who those people are. The words are –dependable-integrity-earnest.”

“So, what do you think this incentive plan is accomplishing?” -TF

“How else are you supposed to motivate people?” Reggie asked. “I look around at what other companies do and bonus systems are used almost everywhere.”

“Why do you think bonuses are used in most companies as a motivation tool?” I asked.

“Well, I just don’t know of any other way to get people to go the extra mile, to give their best effort,” Reggie defended.

“I think you have your answer.”

Reggie looked puzzled.

“That’s your answer,” I continued. “Most companies use bonus systems, because they don’t know any other ways to properly motivate their teams.” -TF

“So, you clearly understand that you are the problem?” I asked. Events were becoming clear for Reggie. His incentive programs were backfiring. In the short run, his company’s margins were not compromised, but long term, he had created a culture cloaked in clandestine competition. His managers had gamed the system to beat margin quotas.

“We had hired a compensation consultant to help us structure this incentive program,” Reggie defended. “They were very professional and seemed expert in their process.”

“Tell me, Reggie, what impact did this incentive compensation have on your manager’s contract?”

Reggie moved his head an inch, “What do you mean, what contract?”

“You know the contract. The contract that says –You get paid every day to come to work and do your best? To focus your efforts where they are most effective? To give us your best effort?”

Reggie didn’t know how to respond. “Yeah, but that doesn’t seem to work around here. People don’t come to work and do their best unless you, you, you hold some of the money back and give it to them as a bonus.”

“So, what you are saying is that you don’t trust them to do their best, so you don’t give them all their money unless they show their best effort? Then you give them their, well, you call it a bonus.”

Reggie slowly nodded his head.