Skewed incentives destroy work

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Let’s be honest upfront here. Any discussion about bonus pay is a little fraught or confusing to most people. Why? In reality, a lot of people have no idea exactly what their salary represents or how it’s determined. Middle-class people are commonly raised with the idea that discussing money is gauche, so a lot of people don’t ask about their salary and how it’s determined — and this gives companies, as opposed to individuals, a lot of advantages during the hiring process. The whole deal with “money” and “transparency” is very far off in America, which has been hurting women and minorities for years.

Now throw bonus pay into this whole mess. As of late 2014, bonuses were making up a higher percentage of payrolls than ever before. I don’t have specific stats on bonus pay in 2016, but I’d assume this is trending upward. A lot of people tend to make more from bonus pay than their base salary, and oftentimes, bonus pay is contingent almost exclusively on revenue growth streams. I’m not knocking this per se — why would you hand extra money to someone if they weren’t generating money in the first place? — but the bonus structure in most American companies is creating a lot of subsequent side issues.

Consider the CEO compensation ratio. I think the CEO is obviously an important member of any organization, and his/her ass is on the line when stuff goes south. Right there, they deserve more compensation and more bonus pay potential. But — as of late 2015 — the ratio was about 300-to-1 at most North American companies. That is to say, a CEO makes $300 for every $1 a median worker makes. You want to come at me about a basket of deplorables? Start right there. Most CEOs are the furthest from the end customer of their service/product, meaning you make more and more money as you race away from those who actually buy your shit.

If we live in the “Knowledge” Economy, why are bonuses so tied to hierarchy?

And as The Wall Street Journal has noted, CEOs often get their bonus pay even on a bad year — because the companies use pro forma measures to calculate. This is all part of a rich tapestry around the narrative of “The rich get richer,” which explains much of the political climate in America today too.

But there’s a deeper problem with bonus pay. What’s that? Let’s explore.

Bonus pay: Northwestern research

Here’s an article called “Do Performance Incentives Make Us Greedy?” And here’s the money paragraph, right up near the top:

The answer appears to be yes, according to new research from Nordgren. He and a coauthor found that people who are rewarded for their performance express more desire for money than people who receive fixed payments — even when the amounts they end up earning are similar.

Think about how many companies are set up. Sometimes there’s a way for all levels to get a bonus, but often it’s only above a certain salary band — and a lot of companies do “bonus as percentage of base,” which means the top dogs — higher base — get higher bonuses. Logical, right? But if you look at this research, here’s the troubling thing. People who get high bonus pay essentially have a greater desire for money. When your desire for money goes up, a lot of valuable stuff gets tossed out the window. What do I mean? Stuff like:

  • Caring about your employees as people
  • Effective communication
  • Listening to new ideas unless they can be proven to make money

This “chasing the cheddar” culture makes workplaces miserable to sit at 50 hours/week. But because of the possibility of bonus pay, that’s often the culture we create.

Could this bonus pay culture ever shift?

Absolutely, positively no. It will never change. (But in the next section, we’ll try to adjust it.) Check this quote, from the end of the Northwestern research:

But this is probably shortsighted. Companies need to attract and retain the best workers they can on a reasonable budget. If firms ask employees why they work there, “they don’t want the first answer to be ‘Because my principal concern is money, and this place pays me more,’” Nordgren says. “That’s the last thing they want to hear.”

I disagree with the end of this quote. I actually think most people running point on hiring processes have no idea what they want to hear aside from “Yes, I will take this job for less money than I am worth.” (With the add-on of “And you can treat me like a pig for three years! I’ll take every last urgent project!”)

Bonus pay culture is a direct descendant of “Eat what you kill.” That’s how guys love to think about work. “If I hit my targets,” the theory goes, “I’ll rake in the cash.” These people want cash — and once bonus pay is in play, they want more — and so they embrace this. This is also why so many half-assed bullshit products are released every year. Someone thought it was a good “revenue play” that would help their bonus pay. If they get lucky and it pops, good for ’em. Most of the time consumers are just like “Huh? What the hell is this thing?” (See also: choice overload.)

Could we tie bonus pay to other factors?

This would be interesting to me. Let’s say bonus pay is contingent on four factors, weighted at 25 percent each. Those are:

  • Connection to new revenue streams
  • Effective communication with employees and direct reports
  • Giving or community engagement
  • Feedback from those under you on your performance

This would be data-driven off performance reviews, which admittedly are horribly flawed in their own right. But now, if a guy wants a fat bonus, he needs to focus equally on revenue generation, communicating down the chain, being seen as a good boss, and giving back. This would ideally create better managers and more well-rounded employees. Half the reason people give for not volunteering is “So slammed on this new revenue play!” Well, now they wouldn’t be. Their bonus pay would be 1/4th tied to getting out in the community.

I try to think about work in different ways, and I also try to call out some managerial BS we’ve all experienced. If that kinda sorta interests you, I do a newsletter every Thursday. Feel free to join up.

Is this all legal? Probably not. Would a CEO punch me in the throat for proposing it? Almost without question. But if we have unrestrained salaries and bonuses for the top level, do you see how that begins to fray trust throughout the workplace?

Bonus pay and the expanding C-Suite

Written about this before, but one of the biggest jokes of the past 20 years (to me) is the expansion of the C-Suite. It used to average five members; now it averages 10. The conventional logic for this is “Well, business is more complex and faster.” OK. I somewhat buy that. But when you’re adding titles like “Chief Strategy Officer” or “Chief Fun Officer” and no one knows what those guys are doing all week, that’s a problem. Those guys are definitely making a higher base than you. And, yes, their bonus pay is likely higher. So you’re busting your ass all week on “urgent projects” and they’re taking meetings? And who ends up with more at the end? Them. Seems fucked-up, right?

The answer to most of this is “Well, that’s how hierarchy works.” Indeed. But hierarchy hasn’t actually been working for people for a really long time. It’s given us insane income inequality, and that’s largely rooted in “You can’t talk back to this person because they have more years of experience and thus make more money.” If we’re really living in The “Knowledge” Economy, then why in the shit does “years in a vertical” matter? Answer: it doesn’t. The information, knowledge, and ability to access it and use it should be what matters. Bonus pay should come from that, in part.

What else you got on bonus pay?

My name’s Ted Bauer. Get at me anytime.

Blogging, largely about work and how to improve it. How I make (some) money:

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