It is people’s abilities and behaviours that drive business success. While training, leadership and motivation are critical to success, bonuses can also help improve performance. However, the impact of bonuses can be good, bad or downright ugly:
One client who operated a number of depots was having problems in promptly collecting money from customers. The credit controller was struggling to get depot managers to deal with invoice queries which was delaying payment. Managers received bonuses based on their depots’ profits and I suggested changing the bonus scheme to also reflect the collection of money from customers; this together with some other improvements resulted in the equivalent of an extra two weeks sales in the bank.
The depot example shows that bonuses should, where possible, take account of wider business objectives. Bonuses based on sales targets could lead to higher sales, but could that be through reduced prices? Can measures be put in place to manage the risk? …..Could bonuses affect team spirit? Should there be more than one element to a bonus to recognise individual, team and organisational performance?
Errors or distortion of reports used for calculating bonuses can also be a risk. An extreme example is Pacific Gas and Electric Co in the States*; their safety system included bonuses for supervisors of crews reporting the fewest leaks. An internal audit found that the reports were inaccurate and in reality there were more leaks. Sadly, 8 people were killed in an explosion on a line before it had been repaired.
A bonus is only one way of encouraging better performance. Team spirit and feeling appreciated by the organisation are also extremely important. When those things are in short supply, the more financial incentives come to the fore. Another important factor is effective procedures together with sound monitoring by management.
If you feel an aspect of your business is underperforming or if you are concerned about the risks posed by bonus schemes, then do feel free to get in touch at email@example.com.