Too many times I’ve talked about bad examples of incentive programs. Too many times.
I keep asking myself why companies still continue to design bad incentive programs?
The short answer - I don’t really know. Some of it is purely based on the fact that we keep seeing them happen and because we’re influence by what others do we continue to do that. Until the “social norm” is such that bad incentives aren’t tolerated - there will continue to be bad incentives. As long as the vast majority of clients hear the same tired shtick about trophy value, Maslow’s Heirarchy of Needs, Antecedent-Behavior-Consequences - they will believe that is the truth and continue to reinforce a bad practice.
As long as incentive companies can get richer by designing bad programs they will continue to design bad programs. But I’m rambling.
What I wanted to address was this post on “Seeking Alpha” - an investment advice site. They posted today on the new management “incentive program” that SuperValu is installing to hopefully drive performance. Here’s a link to the full discussion (well done BTW) - but the summary of the plan is:
- For 2012 - 2014 Employees will receive up to 4.8% of the company's market cap increase
On the surface that looks pretty good. As an employee, if I help the company grow and increase the value of the stock - I can share in the profits. Sounds like I’m aligned with what Management, the Executives, the Board and all the other stockholders want.
Except... as the author explains in pretty good detail... it is a hugely bad idea.
Here are his points (and keep these in mind because whether you’re talking about a financial incentive or a non-cash incentive - these RULES stay the same.) I am moving the authors points around a bit to aid in my writing...
Point #1...
The problem with this bonus program is that it is largely based on events that are outside the control of employees. Yes, a company's stock price is correlated with business performance to some extent. But over short periods, other factors can play a much larger role in determining whether a stock rises or falls. Should managers really be paid (or not paid) as a result of Federal Reserve interest rate decisions, OPEC quotas and/or Chinese economic growth? All of these factors and then some help determine the multiples at which stock prices trade, so it seems silly that employees should be compensated based on things they cannot control.
Incentive Lesson #1
Reward things people “DO” - not things that happen when people are doing things. Big, big difference. That paragraph says it all. Say, just for grins - the market bounces back and a rising tide floats all boats. Do the managers really deserve that bonus? Probably not. Look at your own incentive programs. How much of what you’re basing your payout on is within the manager’s control?
Reward efforts not effects.
Next Point from the article...
If the stock price just returns to its 2007 level (so shareholders who have owned the stock over this period would end up with no gain), the bonus payout could be around $250 million. This is more than the company has generated in operating income over the last four years combined!
Incentive Lesson #2
TOO much incentive. The amount the employees could earn is just too big. It will create unintended consequences. I did some quick math and based on the total number of employees it amounts to about $1,300 per person employed. But that includes full and part time across all stores (190,000 employees.) If you look at just headquarters personnel (2,400 roughly) it comes out to... wait for it... $104,000.
Not sure about you but - that’s a lot of cabbage in this economy.
Keep that in mind as you read the third reason this plan is bad...
This type of compensation structure results in a misalignment of incentives between shareholders and management and can be destructive to the company.This particular topic has been discussed in more detail before, but the short story is that it encourages managers to take more risks than they otherwise would, because they don't share in downside pain but they make out like bandits when it comes to upside rewards. (Emphasis mine)
Incentive Lesson #3
Combined with #2 - the program isn’t aligned, really, with the goals of the company. As it stands, an employee can make out like crazy by doing things that in the short run influence the stock market - but don’t really enhance the performance of the company.
I ran into this once in company that was running a “cost reduction” program with big rewards if they save a lot of money. Some of the suggestions - Get rid of employee health care.
Yep... get rid of health care. Saves the company money, I get a big bonus. I quit because the company doesn’t have health care.
Yeah - smart design.
So summing up...
- Align
- Behavior-based
- Reasonable and ethical
Really - you can’t make this stuff up.
Important post, Paul. One of my early posts was on behavior outliers and how to companies tend to reward deviant behavior by focusing only on results.
That's why I'm so passionate about *strategic* recognition: You must positively reinforce employees only for those actions that reflect the company values while achieving the strategic objectives.
If you got the product out the door on time/on budget, but you did so while polluting the environment (and being green is a key company value), then you failed. Period.
That old post is here, digging into research by Singapore Management University: http://www.recognizethisblog.com/?p=259
Posted by: Derek Irvine, Globoforce | May 06, 2011 at 05:18 PM