When I read “Discovery-Driven Growth” by Rita McGrath & Ian McMillan, I came across this quote which I thought was so appropriate for this post: “Whenever you see someone doing something really stupid in business, there’s a good chance that he thinks he’s being rewarded for it.” We all know this scenario and it doesn’t usually turn out well for businesses. We want people to go left but they go right. And sometimes it’s because we set the cheese at the end of the maze on the right, not the left. Our fault. How do we fix the problem? We need to look at the way our pay and incentive programs are set so we encourage the behavior necessary to make the business successful.
Incentive programs at many companies are still tied to the static budget. You may recall in one of my other posts I said the budget represents a best guess about where the business will be, given the set of assumptions made at the time the budget was created. Tying the budget and bonuses together makes the budget even more suspect as to its value. This is because it inevitably leads to the back-and-forth negotiating that is such a frustrating exercise during the budgeting process. Because employee bonuses are tied to achieving a static number, employees are motivated to get the number as low as possible to make the task involved in getting the bonus easy. Management, on the other hand, has business growth in mind and wants to set the target as high as possible to gain the most. What we end up with is a compromise of something in between that doesn’t reflect employee capabilities, company capabilities, or economic conditions.
What if, instead, we structured the incentive program so it was based on the attainment of short-term goals actually related to the strategic plan of the business or on relative measures of growth year-over-year? This type of setup keeps employees focused on the things that are important to the company and would eliminate the frustration employees often feel when they know getting to the static budget number is not possible. For example, if the company wants to grow sales year-over-year, the bonus program could be set so for every 2% in sales growth achieved, the employee receives 5% of their salary as a bonus. What if we also said there was no cap to the potential bonus a person could achieve? Do you think the employee would be more motivated to do the things needed to grow the business if they know they will benefit from their efforts?
Now, I know there are pundits out there who will say money isn’t a good motivator and things like promotional opportunities and a good working environment are equally, if not more important, in keeping a work force happy. I will not disagree these are important. But for those of you familiar with Maslow’s Hierarchy of Needs, you know getting to the higher levels of the pyramid (love, belonging, self-esteem & self-actualization) is not possible until you take care of the base needs like food and shelter. The only way this happens is if you have money to pay for those base needs so they are no longer a concern.
One note about structuring an incentive program around relative measures like year-over-year growth — it is essential the business evaluate the current economic conditions to determine if an adjustment to the base figure is necessary. This is especially true in situations of large economic downturns or upswings. If you don’t adjust the base you are working from, you can create the same situation for employees as if they were measured against a static budget. The number may just be unattainable and the same frustration levels and lack of motivation will return.