It is people’s abilities and behaviours that drive business success (and also failure). Training, leadership and motivation are critical to success. For people to perform well they should understand the purpose of what they are doing and its relevance to the organisation as a whole; it is also important for them to have feedback. Something that may also encourage people to go that extra mile is a bonus. Bonuses are likely to influence behaviour, however behaviour can be good, bad or downright ugly:
One client operated a number of depots and was experiencing problems in collecting money from customers. When I looked into the reasons it became apparent that the credit controller was having problems in getting depot managers to respond to customer queries, which in turn was delaying payment. The managers received bonuses based on their depots’ profit and I suggested that this was changed to also reflect the collection of money from their customers; this together with some other improvements resulted in the equivalent of an extra two weeks sales in the bank.
The above example shows that it is important for bonuses to be aligned as far as possible with the desired outcomes. A sales team that receives bonuses based on sales targets may conceivably be incentivised to sell more through reducing prices; at the very least there should be controls in place to prevent this. However, careful consideration also needs to be given to structuring bonuses to encourage individual, departmental and overall performance as well as team spirit – there can be a strong argument for having more than one element to bonuses.
The client I mentioned had a centralised accounts department and there was little scope for depot managers to manipulate their figures. However, receiving bonuses and being able to influence the reports upon which they are based can be a risk. I am grateful to Norman Marks who drew my attention to the article that prompted me to write this blog; it seems that Pacific Gas and Electric Co in the States had a safety system that involved bonuses being paid to supervisors of the crews that reported the fewest leaks. An internal audit found that the reports produced were inaccurate and that in reality there were more leaks. It took a considerable time to make the extra repairs and in 2010 8 people were killed in an explosion on a line that had not yet been repaired.
Bonuses are put in place to encourage and reward positive outcomes, however the potential for adverse consequences should also be recognised and proper checks and balances put in place. I would be interested to hear your thoughts about bonuses. When do you feel they work well and……not so well?