Ohio State football coach Ryan Day earned a $250,000 bonus when his team beat Clemson in the Sugar Bowl. His quarterback, Justin Fields (who received no compensation), was unfortunately injured during that game. If you were Coach Day, would you have asked Fields to play in the upcoming national championship game against Alabama?
A similar situation confronted Fields’ high school coach, who kept Fields out of his final game as a high school senior. The coach did not want a broken finger to damage his star player’s long-term career prospects.
The high school coach placed player well-being over other measures, as coaches should. But was this true for Ohio State? I doubt it, owing to this indicator: Coach Day would earn another $350,000 bonus should Ohio State beat Alabama. But the bonus he receives for coaching his players to maintain 3.0-grade averages is only $50,000. Where would you put your focus if you were Coach Day?
Do you know why many companies provide higher incentives for sales representatives who beat their forecast by a lot versus a little? Because without this incentive, reps in the fourth quarter would delay booking any extra “above forecast” orders until the next fiscal year. Without the added incentive, reps would delay orders in order to secure a bonus for the coming year.
What incentives are driving the decisions your leaders make? Do they align with your objectives?
Studies show that in the interest of meeting quarterly profit promises, which keeps the company’s stock price from falling and management stock options from losing their value, managers make decisions that hurt longer-term profit growth. Clearly, we leaders pay too little attention to what we incentivize.
With weak campaign finance laws, we incentivize our political representatives to make decisions that bring in political donations. What if, instead, we publicly financed elections and measured politicians on effectiveness and collaboration? Our US Congress and State Legislatures would work a lot better for We, The People.
Measurement is straightforward. Measures start with the strategic plan after which you identify leading and lagging indicators linked to the plan’s goals. Want revenue growth? Explore whether customer retention, awareness rate, new product revenue, revenue per customer or other measures will best provide leading indicators of revenue growth.
The strategic question you then need to answer is on which measures will you incentivize your management team and, if all employees are bonused, your employees? Will you reward company-wide achievement? Business-unit? Individual? Process or outcome? Only in areas where you need a particular focus?
Here’s an example. A business-to-business client had to invest a lot of time and creativity to craft winning responses to Requests for Proposals (RFPs). When the bonus shifted from rewarding individual sales reps for a win to the entire team creating the RFP response, win rates zoomed upwards.
You also have to make sure that incentives are linked to the achievements you want to see. For example, public company CEOs typically secure larger bonuses when their company stock price rises. But what if any rise was due to macroeconomic conditions and not the specific success of the CEO and his/her company? If Boards want to truly incentivize achievement, wouldn’t basing bonuses on market share or stock price increases relative to key competitors make better sense? That way, a CEO only earns a bonus if they outperform other companies in the same sector.
Another question to consider is, “What might be disincentivized by what we incentivize?” Building on the opening storyline, college athletes often do not graduate because coaches place more emphasis on training and winning than studying. (Hats off to Joe Paterno, who had a winning record of graduating players.)
The CEO of my husband’s former employer kept demanding collaboration among his business leaders. But the company’s incentives were largely linked to metrics of individual business unit performance, not company-wide achievement. The same was true of our CEO when I worked at IBM. In both cases, a CEO correctly demanded collaboration across businesses to advance the strategic plan; but the executions fell short because the incentives were misaligned. Collaboration is always disincentivized if you only reward individual performance.
There are no simple rules when it comes to incentives. Your culture, industry practices, stage of the company, and business model, among other factors, enter the consideration. Be a systems thinker to ID the right leverage points in your company where a positive change will make the most significant difference. That’s what you incentivize.
The only universal rule of incentives is this rule: Pay attention and take time, when both setting them, then studying them in action to adjust as needed.