Competition for Bonuses Undermines Cooperation

Competition for Bonuses Undermines Cooperation

As many companies approach their fiscal year end, millions will be paid out in annual bonuses. Most of these bonuses will be from pools that employees compete for. Typical schemes include a limited pool of resources that is divided among those few who have met specific goals.

What impact are you having when you put these bonus programs into play? Are you actually encouraging suboptimization, whereby an individual or department benefits at the cost of another? This short Forbes video addresses these very questions.

Because they are competitive, annual bonuses can cause employees to take action at the detriment of another employee, another department, or even worse, a customer in order to reach the goals. Bonuses that are tied to specific metrics can cause employees to focus on working around the system to reach an individual objective rather than improving the system. In Understanding Variation, the Key to Managing Chaos, Dr. Donald Wheeler notes than when people are pressured to meet a target, they can proceed three ways: work to improve the system, distort the system, or distort the data.

The recent Wells Fargo phony account scandal is a staggering example of what can result when incentives schemes are implemented. But small-business examples also abound. Let’s says your inside sales team must enter at least 100 orders per week. You’ll give an end-of-the-year bonus to the team if they average greater than 100 orders per week. Your accounts receivable (AR) team is incentivized on collections. They must collect receivables in 30 days or less. If they average less than 30 days, they will received an end-of-the-year bonus. At the end of the year, you learn that sales has exceed their goal and accounting has failed. 

Digging deeper, however, you learn that in their zeal to move on to the next sale, sales team members have not taken the time to ask for the correct billing address. Accounting unknowingly sent many of the invoices to a delivery address where they would often disappear into a black hole. It would take a phone call (or two or three) from the AR team to track down the correct billing addresses and resend the invoices, causing serious delays in payment.

Sales achieved their goal at the expense of the AR team and the entire organization. What good are sales if you don’t receive payments in a timely fashion? And how much time and rework did this scenario demand over the course of a year?

Dr. W. Edwards Deming said “Your system is perfectly designed to give you the results you're getting.” That simple statement sums up the problems with individual performance-based bonuses. Individuals in an organization are part of a bigger system. Attempts to isolate employees and reward them for results that are dependent upon many other factors in the system are  misguided.

Consider instead a plan in which everyone can win when the company performs well. A profit sharing plan in which all team members participate fosters an environment of collaboration to achieve the company’s aim and provide a sense of involvement and ownership in the company’s growth. Such plans encourage everyone to work to optimize the system and achieve the best overall results.




Beth -- Nicely said. Bonuses and commissions are not the problem -- Systems and poorly designed programs ARE! Your pay plan is your #1 communications tool to all employees -- Not just your salespeople. It must be clear, easy to understand (like the Gettysburg Address; written primarily with one syllable words)... and, it must be impossible to cheat ... Again, well said.

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Eric A. Budd

Organizational Excellence | Learning and Development | Process Improvement | Multi-team projects

7y

Beth, another reason that competitive bonus structures are damaging relates to Deming's remark that "Best efforts won't do it!” One of the underlying assumptions in competitive bonuses is that people will be motivated to do their best (we know, however, that incentives cause motion, not motivation). Even if we do get best efforts from everyone, we end up with the world that you describe, the best efforts cause results that prevent customers from being well-served. It is worth the effort to explore the validity of the assumptions about people that underlie many popular management practices.

Eric A. Budd

Organizational Excellence | Learning and Development | Process Improvement | Multi-team projects

7y

Well written, Beth Savage. We will benefit as a society when more managers follow your leadership example.

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Allen Scott

Management / Quality Consultant “The measure of quality, no matter what the definition of quality may be is a variable.” (Shewhart, 1931)

7y

A wonderful piece of writing, everyone will win in the transformation Deming taught us...

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