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Bonuses – the good, the bad and the downright ugly

6 January 2012, 5:01 pm

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 depot’s 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?

Filed under Management, Opinion, Process improvement & risk management.
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Greece – where’s the accountability?

7 November 2011, 3:01 pm

Over the past few weeks I’ve heard mutterings about Greece fiddling its figures in order to gain entry to the Euro and the sentiments in this blog crossed my mind at the time.  However suggestions of fraud (or similar) should not be taken lightly and I decided to keep my thoughts to myself.  Mutterings are one thing, blogging about it is another.

Last Thursday, on Question Time, Benjamin Zephaniah said that Greece “cooked the books” to get into the Eurozone.  In this month’s Accountancy magazine, writing about the Eurozone crisis, Emile Woolf said, of Greece’s entry to the Eurozone, that “Rampant profligacy had masqueraded as economic rectitude in the fraudulently manipulated figures supporting its entry in 2001”.  Vicky Pryce, a Greek born economist, speaking on television this morning said that when George Papandreou took over as Prime Minister he found that things were much worse than he expected, because the previous government had “falsified the data”.   Claims made in the national media are in my mind more than a “muttering”.

Falsifying financial information can lead to bad decisions – it’s old adage but very true: garbage in, garbage out.  This seems to have been the case with Greece’s acceptance into the Euro and its huge borrowings which resulted in devastating economic consequences both in Greece and abroad.

In the UK there are criminal offences such as False Accounting or Fraud by False Representation.  Surely there are similar laws in Greece? after all they are also in the EU, which seems to be adept at imposing legislation on even minor matters on its members!! 

Much has been made of a culture of widespread tax evasion in Greece.   Greece also fairs badly in Transparency International’s Corruption Perception’s Index, when compared with its EU counterparts.   I get the feeling that norms differ from many other EU countries.  Arguably a lack of financial probity has led to the crisis and I wonder whether there needs to be a cultural as well as a financial fix. 

Public debate has centred around the way out of the crisis and what the future holds.  However, seemingly serious claims have been made, but with no suggestion of prosecution.   Greece’s medicine is one of severe austerity, but is there also a real commitment to accountability and financial probity?   Changing a culture may be easier said than done but, if there was wrongdoing, then surely a good start would be to bring those responsible to account?   

This morning’s news was that Mr Papandreou is stepping down as Prime Minister.   Agreement, referendum, no referendum and now it seems that the favourite to take over is a former governor of the Bank of Greece, who oversaw the country’s entry to the Eurozone.   Am I the only person who thinks that this crisis is surreal?

I am passionate about the importance of reliable information as a basis for sound business decisions and am sure that the same should apply to governments.   I’d be interested to hear your views.

Filed under Accounts, Cash flow and funding, Opinion.
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Put your head in the Cloud – but keep your feet on the ground!

24 September 2011, 6:48 am

A lot of the work I do is around the information that comes out of a computer or the processes before data is entered.  What happens in between is to me, quite frankly, a bit of a dark art.   

I recently attended a seminar “Cloud Accounting for the 21st Century Debunking The Myths” hosted by one of my former partners Richard Messik and his colleague at Cloud Advocates David Terrar. 

During our time at Jayson Newman, Richard was involved with the development of Easycounting an internet accounting solution that was aimed at IT contractors.   The term “Cloud” hadn’t been coined and as Richard freely admits he was ahead of his time!

I found the event to be quite an eye opener.   Not only were the advantages of Cloud computing such as mobile usage and reduced infrastructure and maintenance costs made abundantly clear, there was also really interesting discussion around the reasons for the reluctance of some people to adopt the technology:

  • Security was cited as one of the main areas of concern.   The various speakers pointed out that the level of security offered by Cloud providers is likely to be MORE secure than the average on premises system.   One provider who was at the seminar told me their servers are housed in a bunker with multiple power supplies and internet connections.   As providers supply multiple organisations, economies of scale can be achieved to ensure state of the art firewalls and antivirus software.
  • Another reason seems to be that people are more comfortable knowing where their data is.. and   until yesterday that included me.!!  The fact of the matter is that in our everyday business and personal lives we put trust in outside organisations.  Many are already comfortable using internet banking or social media… which are in the Cloud.  For generations it has been second nature to put your money in a bank and not under a mattress, but going back years I’m sure people had a similar reticence!

People who have been almost weaned on Facebook are now entering the business world, they don’t have the same hang ups and I am firmly convinced that Cloud technology is the future!   

Having said that…. buyer beware!!    The Cloud is now high on my agenda, however it is still early days for the industry.  Appropriate industry wide standards need to be developed and it is possible that some providers could go to the wall or not follow best practice.  Proper due diligence and stringent service level agreements are imperatives!!   So by all means put your head in the Cloud but do also keep your feet on the ground!!

Filed under Opinion, Process improvement & risk management.
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Double dip or not – 5 tips for steering through uncertain conditions

23 August 2011, 1:55 pm

When the credit crunch hit I was struck by how many businesses adopted a slash and burn mentality.   Doubtless many businesses had been complacent and there was fat that could be trimmed, but also there was a reluctance to spend money on the things that would take them forward, whether it was marketing, skills, IT or equipment.

The financial markets are in turmoil, the ICAEW/Grant Thornton business confidence index is now at its lowest level for two years.  Whether the concerns are well founded or not there is uncertainty in the air!!  Here are some tips for steering through uncertain conditions:  

Review your business strategy.  What are your business’s strengths?  What are its weaknesses.  There may be new opportunities as well as risks.   Circumstances may have changed and you may need to change your approach.  

Spend smart – yes do cut out fat, but if you believe your business has a future then invest in it.   Approaches may need to change, for example what was smart marketing last year may not be smart now, however it doesn’t mean that you shouldn’t invest in marketing.   Talking more generally, think about what you are spending on and make sure it is effective!

Don’t be rash manage your cash!

- I generally recommend a 13 week cash forecast that is updated every week.  

- Your customers may not be as secure as they were, so having strong credit control is an imperative – take the attitude it’s not a sale until it’s in the bank.  

- Make sure everyone whose job impacts on cash knows they have a part to play – from the sales director to the person that issues invoices to customer services and operational department. 

Drive safely.   If you are driving a car it’s a good idea to not only look at what is happening to the next car in front but also further ahead- the same applies to business.   You hopefully have a business plan – invariably plans and outcomes are not the same.   It can be a good idea to look beyond the 13 weeks (at least to the end of the financial year) and prepare financial forecasts, so you can see where profits and cash are heading.  

How often should forecasts be done?  This can depend on the company’s circumstances.  It may be sensible for a complex business with unpredictable income and a tight cash position to update forecasts every month.   However a small uncomplicated business with regular income and no anticipated cash flow problems may not even need to bother to prepare formal forecasts as long as the circumstances don’t change.  

Make sure that you have a vehicle that you want to drive.   Continuing the driving analogy, would you want to drive a car with an unreliable speedo or satnav?  Wrong information can lead to wrong decisions.   Make sure that your management information is reliable and informative; this applies to all key information not just accounts.     

Would you be keen on driving a car that is leaking oil?   Cash is the oil of business, it is a good idea to minimise the chances of it leaking (either through inefficiency or fraud). 

Make sure that you have processes, information and skills that help you take advantage of opportunities and to mitigate risks.  

Changing circumstances can require new approaches, however the basics shouldn’t change;  informed decisions can then be made that are relevant to your business as opposed to getting overly influenced by a general tide of pessimism or optimism. 

If you would like to know how this can be applied to your business then please contact David Lewis, on 020 3137 2279 or e-mail mail@camroseconsulting.co.uk.

 

Filed under Accounts, Cash flow and funding, Management, Opinion, Process improvement & risk management.
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News of the World – an unanswered question

11 July 2011, 9:51 am

My initial reaction to the recent News of the World revelations was that the people at the top must take responsibility.  I took the view that senior management are ultimately responsible for the organisation’s culture and when there is a serious breach of ethics they should resign.

As mentioned in my last blog I have recently been going back to my roots and been carrying out some internal audit projects.   Internal audit can be a means of finding improvements that add to the bottom line and also be used to see if risks are effectively managed.

One risk that is a key concern to well known organisations is the risk of reputational damage.  It often takes years to build a reputation but, as has been seen with the News of the World, reputations may be lost very quickly and the impact can be catastrophic.

The nature of reputational risk will vary according to the type of business.   Even within the same industry there can be differences –arguably a newspaper with a reputation for cutting edge investigative journalism would have much greater pressures to find a “scoop” (and therefore potential for unethical behaviour) than your local freebie.

Hindsight is a wonderful thing; however I am wondering how the News of the World’s senior management approached the risk of unethical journalistic behaviour?  Without direct experience of the newspaper industry, the sort of things that spring to mind are:

  • Whether there was a culture of the end justifying the means no matter what?  I must admit I am not sure what the “end” was with some of the most recent revelations!
  • Conversely did the organisation apply a code of conduct?   (I note that the press complaints commission has an editorial code of conduct, which appears to have been breached).
  • Were steps taken to embed the code of conduct in into the organisation’s culture?  Say, through training or annual declarations of compliance to remind staff of the code or even audits to ensure compliance.
  • Was there a whistle blowing procedure where members of staff were able to report unethical behaviour without fear of retribution?

Not knowing about the hacking at the time may seem to be a lame excuse, although on reflection senior management cannot be expected to know everything that is going on.  However did the culture and processes, which I believe are the responsibility of senior management, provide a reasonable chance of them finding out?   To me this an answered question.

Filed under Management, Opinion, Process improvement & risk management.
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Is “audit” an emotive term?

27 June 2011, 6:44 pm

For many people their experience of audits is of external audit, which to a large extent is a forced purchase required by law.   For the uninitiated an external audit is carried out by an independent firm of accountants and its main focus is forming a view on whether the annual accounts give a “true and fair view”. It can be beneficial to businesses in the following ways:
• it should provide stakeholders with confidence in the accounts and may even help improve a business’s credit rating
• it provides a focus for staff to make sure the accounts can stand up to outside scrutiny
• it potentially provides an “MOT” check on a business’s accounts and aspects of its finance function
however for many directors these are not very tangible benefits.

Whilst the end product of an external audit is a fairly standard publicly available report on the annual accounts, there may also be spin offs of recommendations for improvements along the way.  However these recommendations are a by-product and not the main purpose of the audit; the extent of recommendations will also depend on how the auditor’s work is approached and the experience of the staff involved.

Internal auditors can be employees of the company.  The company can set the agenda and focus resource where it matters it may extend into operational areas.  In other words internal audit can be used proactively and contribute to business success.   I was recently introduced to an organisation who were looking for some internal audit help.  The projects reminded me about just how much value can be added when audit resource isn’t handcuffed towards the annual accounts!

The combination of my financial management and past audit experience is a pretty strong mix for this type of work and I started to ponder on whether there is a market for internal audit services.  However I was also concerned from a marketing perspective that auditors may be viewed in a negative light.  Was I right?

I decided to carry out a LinkedIn Poll. Participants were asked what most closely describes their feelings when they hear the words “audit” and “auditor”? There were three possible answers:

POSITIVE, beneficial to the business
NEUTRAL, a few benefits
NEGATIVE, waste of time & money

The results surprised me, at the time of writing 110 votes have been processed.  41 people have voted positive, 51 neutral and only 18 negative.  I am however taking the results with a pinch of salt as it is clear from the comments posted that a number of auditors voted!  Nevertheless the comments do provide a useful insight.  

Perhaps most telling from my perspective are the following remarks:

“…..I tend to see the word Audit and think of history. Whilst one can learn from history and prevent errors that went unrecognised from re-occurring I prefer to look forward and hopefully improve Corporate potential. To this end I would prefer to recognise Internal Audit as being Business Process Analysis & Improvement.” Graham Smedley

“As an NED who chairs a number of audit committees, my advice would be to strengthen risk management and internal audit – it would be much more useful [for annual accounts] to disclose the amount spent on these functions rather than know what the [external] audit fees are!” David Young

Graham’s comment, makes me wonder if “audit” is an emotive term. In any event I am not sure how many people realise there is more than one type of audit…perhaps it’s time for another poll!

Finally I would like to thank all of those who participated in the poll and discussion.

For further information please contact me, David Lewis, on 020 3137 2279 or e-mail mail@camroseconsulting.co.uk.

Filed under Accounts, Process improvement & risk management. Tagged ,
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