Considerations regarding bonuses and long-term incentive plans – Part 1

Over the last decade, I have seen various forms of bonus schemes and long-term incentive plans. Looking at all these attempts to „motivate“ staff by offering financial incentives, I have come to the conclusion that – in almost all cases – they have failed their purpose. I personally believe that incentive schemes very often are rather destructive, particularly when looked at over a certain period of time. They can hamper or even destroy individuals’ motives to perform well, undermining loyalty, hindering team performance, etc.

On the following pages I have summarized my considerations why I believe such plans fail but also what can be done to maintain motivation. Please take note that they reflect my personal experience and judgment. You are kindly invited to question and discuss them with me.

Why incentive plans mostly fail
There are a number of assumptions on which bonus schemes and long-term incentive plans are often based:

Performance is evenly spread across the organizationMarco_170207_1
Most plans are based on this assumption, i.e. if you look at the total of all employees, performance follows a normal spread. This is obviously necessary in order to control costs.
In reality, all companies proclaim that they hire only the best, that they expect their staff to perform high above average, etc. Hence, most leaders are genuinely convinced that the majority of their staff is better than average. If they do not think so, they admit they have failed to hire the right people!
The consequence is that leaders are often not able to pay the incentives they think their staff deserves. Some organizations define quotas how many people may be above average and how many must be below. Both leads to long discussions, unproductive time and often frustrations which negatively influence performance.

Marco_170207_2Individuals’ performance is directly linked to the company’s results
While it is unquestionable that the total of all individuals’ performance result in the company’s productivity, its reputation, etc., we all know that market developments have a very strong impact on companies’ results.
Not surprisingly, bonus schemes flourish when markets go up (mostly because this is one way to gain an advantage on the labor market). But ask yourself: When do you depend more on your staff’s willingness to work hard and perform well – in good times or in bad ones? In the latter situation, bonuses must be cut or dropped which is often seen as punishment. Therefore, when people should be motivated to work hard they may see themselves as the scapegoats, punished for a development they cannot influence.

Money is the ultimate motivatorMarco_170207_3
Okay, money rules the world. But is everybody solely or mainly motivated by money? Are there excellent people on the market who might get their motivation from a creative environment, job security, etc.? Would you like to miss them?
The consequence is that you might spend a lot of money which your employees take – who does not take money – but which does not really influence their motivation to perform.

Marco_170207_4Bonus schemes can (partly) be self-financed
Linked to the assumption that performance follows a normal spread is the assumption that bonuses are at least partly cost neutral, i.e. if a certain amount is budgeted according to number of staff and salary, it is assumed that the underperformers’ share can be allocated to the high performers.
There are a few problems which make this often impossible. Firstly, individuals and functions are difficult to be compared. So, who is doing better is a rather judgmental and subjective decision. Secondly, teams are often too small, i.e. if you would like to pay a significant bonus to a high performer who has a high salary, the bonus share of the rest of the staff might not be sufficient to finance it. Thirdly, in a world where team performance becomes increasingly important it is counterproductive to pay incentives to individuals.

Long-term schemes foster loyaltyMarco_170207_5
The underlying question is: How can we tie an individual’s interest to the one of the company? Indeed, if incentives are tied to the company’s performance and development over time, e.g. with restricted shares, an individual has an interest to focus his/her actions on the long-term well-being of the company.
However, there are three problems. Firstly, for lower incomes the amount paid out with bonuses is not significant. These employees depend on their weekly or monthly income. They hardly see a link between their performance and the company’s growth. Secondly, outside factors have a significant influence on such schemes. This raises the question whether it is prudent for an employee to tie oneself too much to a company, i.e. job, savings, maybe mortgages etc. Thirdly, if those with top incomes can ensure their individual wealth by boosting up share price, the company’s long-term well-being and the personal growth of wealth might be contradicting.
My conclusion is that only a relatively small group of people can be tied to the company by long-term incentive schemes. These are those individuals, who a) hold positions where they can influence the company’s development, b) the whose bonus is significant compared to their normal salary but c) not high enough that they can take the risk to lose the job and continue to live from the profits gained.

Marco_170207_6People do not work as hard as they could
Amazingly, research has proved that most individuals have a natural intrinsic motivation to perform well already in the twenties and thirties of the last century. Still, incentive plans are based on the assumptions that people could do more than they actually do. Why? Are you – yourself –like that? Do you hire people knowing that they have the intention to earn as much as possible with as little work as possible? And if you have the suspicious feeling that somebody does not perform as he/she could: Why don’t you make this an issue with the individual? This would be leadership in the true sense of the word. I do not deny that there are individuals who intend to exploit a company. But is that the majority or a small minority?
Important: The motive to do or not to do something lies mostly outside external influence. The attempt to motivate somebody does hardly ever influence motives. Think about yourself: What are your motives to perform today, what were your motives ten years ago, what might your motives be in ten years’ time? Motives are related to hopes, dreams and needs.
As Reinhard Sprenger says in his book „The myth motivation“: „You cannot motivate but you can demotivate somebody.“

The second part of this text deals with recognition instead of incentives and will be published in two weeks.

The author


Marco Stoll

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