Monday, February 8, 2010

Bonus Plans

In one of my LinkedIn Discussion Groups, we have been going back and forth on the idea of bonus schemes for a couple of weeks now. Today, we got a thoughtful post from John, who said that "Incentives and reinforcement are part of what I design." He offered insights as to how a system might be designed. I responded to one of his ideas.
He pointed out that "bonuses have been factored into sales compensation since the dawn of time because we know that vigorous sustainted effort is required," then asked, "Why here and not in all key jobs?" One of his reasons: "Execs are unfamiliar with the ways that objective measures can be designed for staff, managers, and production people," and goes on later to suggest that "Incentives need to be based on objective measures of performance, and that "ALL incentives are ultimately individual."
While these ideas seem to make some common sense, things that we've learned over the last 30 years or so suggest that they bear some scrutiny. Here's my reply:


I think Scott points to a couple of drawbacks to many bonus schemes. There are some problems with one of his fixes, though.

Let's talk about objective criteria: sometimes they do exist, but it's not as often as we think, and it's never (an I do mean NEVER) as clear-cut as we think. Anyone who's ever seen the Red Bead Experiment can attest to that. It's also almost never possible to separate the performance of the person from the performance of the system in which they operate. So, even when we talk about "anyone who reaches the goal gets the bonus," we assume that it's possible for everyone to reach that goal, completely independent of all the factors that drive the system.

Let me illustrate with an example from my days in the Military:

An Army school convenes twice per year, and runs for 5 months. One class starts in late Fall, the other in late Spring. Each class is led and instructed by two soldiers. During a study of these classes 10-11 years back, one of these instructor teams clearly excelled, by all the “objective” criteria used to measure performance: very low dropout rates, very high academic achievement with very little remediation, almost no legal or medical problems, excellent advancement rates for graduates, etc. The other team, however, didn’t fare so well; their dropout rates were very high, most of their students struggled to pass the weekly exams (despite extensive remediation and night study), they had numerous problems reported from both base security, military police and community police, a high incidence of sick days, and most students who graduated required a lot of extra work to gain adequate proficiency, once they arrived at their units.

Of course, the team with the highest scores on all the criteria won Instructor of the Quarter/Year, Soldier of the Quarter/Year and other achievement awards given by the training command, and were consistently ranked in the top 5 by their commanders—all this, of course, led to rapid advancement for these soldiers

The low-scoring team ended up at the bottom of the heap, in the “not ranked” category, and received letters of reprimand for their poor performance.

Eventually, someone noticed that this difference in performance transcended the soldiers themselves…ALL the Fall classes were better, and ALL the Spring classes were worse. As it turned out, there was a great logical explanation for all of it.

The classes that convened in the late Fall comprised students who had come into the Army right after High School graduation, many on delayed entry programs. They had enlisted for this particular specialization. They were highly qualified and highly motivated, both for the Army and for this school. In contrast, the Spring classes were made up of people for whom the Army was something to do after they had failed to find a job, and who had been put into this class to fill a quota. Some had needed waivers to get into the Army; many had required waivers to get into the class.

Ironically, if you looked at the workloads for the instructor teams, the hardest-working and most creative teams were those for the Spring class. They had to be, just to survive. They had to conduct remedial sessions at night study, as well as before classes, lunchtimes, weekends, etc. They had to continually push the envelope to find new and better ways to get these challenged students to learn. The other team largely skated through the duty…very little extra time, no extra thought needed.

This same sorry story still happens every day in Military recruiting. Recruiters in very populous areas in more patriotic-leaning states have very few problems meeting quota. They get awards, advancements, etc. Those in rural areas work many times harder and often don't make quota, and are forced to accept low evaluations and sometimes humiliating "remedial" sessions where senior recruiters come in and yell at them like drill sergeants ...many of these are just back from Iraq or Afghanistan.

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