Okay, maybe that’s not the most optimistic headline you’ll read today. However, it does reflect a statistical probability.
Well-intentioned companies pay bonuses each year to reward their employees for achieving performance targets. Unfortunately, these incentives seldom produce the outcomes employers had in mind when they set their plans up. Too often they become viewed by employees as entitlements (“When will our Christmas bonus be paid this year?”) instead of as rewards for real, measurable value creation.
Given the nature of this phenomenon, every fall you can find business leaders tinkering with the metrics of their bonus plans, hoping to finally arrive at the magic formula that will produce the hoped-for outcomes. When results don't improve, employers scratch their heads and wonder why.
It's Not About the Metrics...
Truth is, it’s not that complicated. Changing metrics doesn’t solve the problem businesses have with their incentive plans because metrics are not the source of the problem. More on that in just a minute. But first, consider this observation by SHRM:
“One of the main arguments against incentive pay is that it can encourage employees to act in an improper, unethical and even illegal manner. If an employee falls short of his goals, he might be tempted to bend the rules to achieve his target so that he can receive a bonus.
“Wells Fargo’s experience is a highly visible example of incentive pay plans gone horribly wrong. Employees were paid incentives based on the number of bank accounts they opened. In 2016, Wells Fargo was fined $185 million after regulators found that employees were opening additional bank accounts for customers without customers’ permission.
“Numerous studies have shown that paying employees financial incentives to meet their goals can lead employees to make poor decisions and engage in dishonest activity.” (“Does Incentive Pay Work?”, SHRM online article, June 5, 2019, Danielle M. Corradino)
...It's About the Premise
Why do bonus plans fail to produce the outcomes employers intend? Because they are built on the wrong premise.
That’s what happened at Wells Fargo. And it's the reason most companies do not see improved results strictly by honing the metrics of their rewards plans. An emphasis on metrics is rooted in the philosophy that employee behavior can be controlled or influenced by financial incentives. The extension of this philosophy is that improved results will then flow from the improved employee behavior the incentive plan has evoked. What happens instead is that plan participants manipulate rewards to serve their self-interests instead of the interests of their employers.
So...if attempting to influence employee behavior is the wrong premise for an incentive plan, what is the right one?
Incentives should be tied entirely to value creation. That's the right premise. Companies must define a value creation threshold that has to be reached before any value sharing will be done. This will typically be a profit threshold for short-term value sharing and business growth for long-term performance rewards.
Defining a value creation threshold accomplishes at least four things: 1) It protects shareholder financial interests by accounting for the opportunity cost associated with their capital investment; 2) It ensures the company maintains enough "room" in its budget to invest in growth; 3) It educates employees on the need to drive added value before receiving added earnings, and; 4) It creates a unified financial vision for growing the business (between company owners and their workforce). In other words, it turns employees into growth partners.
To learn more about the relationship between value creation and incentive compensation, download VisionLink’s free report, How to Build the Perfect Incentive Plan. This guide will show you how to build your rewards plans on the right premise. It introduces seven keys to creating incentives (value-sharing plans) that enable company growth.
To learn how to adopt a more effective incentive compensation approach, download this free guide today!