Jan 162012
bonuses, commissions and other incentives can distort a business

One of the cornerstones of 1980s management theories is offering staff incentives for performing to certain benchmarks.

While the theory is good, it can go badly wrong. I encountered this personally when at PC rescue we started selling computers systems and, to encourage sales, offered our technicians a commission on any they sold.

Quickly we started getting negative feedback from customers, some didn’t like what they perceived as a hard sell and some believed technicians were more interested in selling a computer rather than fixing the problems.

In a few cases it turned out the customers’ suspicions were correct; we found some the techs had decided it was quicker and more profitable for them to sell a new system rather than to fix the problem they had been sent out to resolve.

We had to change our KPIs and it taught me a good lesson about assuming how staff will respond to incentives.

Courier companies are good example of what happens when incentives and performance indicators go wrong, all of us have had examples of deliveries going wrong because the drivers are under pressure to meet targets. In the worst case, you might get your computer monitor thrown over the front gate.

The systems that encourage this sort of behaviour can damage entire industries, as we’ve seen with the used car industry. For individual businesses, poorly implemented commission based structures, like ours was, eventually build distrust which is one of the reason why electronic stores like Best Buy are struggling.

Google’s recent changes to search are another illustration of what can go wrong with poorly thought out incentives with CEO Larry Page reported to have tied staff bonuses to “success” in social. As a consequence Google are prepared to damage their core business as employees scramble to meet their targets.

The definition of ‘success’ is part of the problem with performance indicators, a government agency I did some work with defines successful worker as having a hundred meetings a year which has some predictable results in how that department operates.

On the bigger level, badly thought out incentive structures are damaging our economy as senior managers are driven to deliver short term objectives while ignoring the long term growth of their business and sometimes even damaging the wider community in the process.

Probably the ultimate level of damaged performance reward is the political system those of us in the ‘developed world’ have allowed to develop in the last fifty years; by rewarding politicians on being elected, we have a generation of leaders who are very good at winning elections but not terribly good at running governments.

While there’s little we can do about governments beyond being careful with our votes, we can watch our businesses closely to see what indicators and rewards work best for us.

Planned and monitored properly, bonuses and performance indicators can work well for a business blindly using inappropriate ones though often turns out to do more harm than good.

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