NEW! The Deadly Sins of Incentive Compensation

Nov 23, 2015

From time to time, I’ve written about incentive compensation. I’m a huge fan of commissions, bonuses, and other incentive comp schemes, when done properly. They reward outstanding work and enable people to share in their enterprise’s success. But incentive comp gets a lot of bad press when it’s done in a boneheaded way – press that makes the practice appear self-serving, unfair, and even dishonest. Some of that bad press comes from me – see my posts on the Veterans Administration, realtor commissions, AIG, and Paul Krugman’s view of bankers.

I write about this subject because not only does designing a really good comp plan require some actual math skill, it also must be an exercise in good quantation – after all, a plan just can’t be effective if it’s communicated so poorly that the recipients aren’t able to understand how it works, not to mention that it will be incomprehensible to those who might otherwise be able to point out its flaws.

If you’ve seen my book, Painting with Numbers, you’re aware that sprinkled throughout it are the Deadly Sins of Quantation. These are mistakes made in the course of presenting numbers that are not just ordinary, harmless mistakes, but ones that affect your relationship with your audience in ways you don’t want. (Send me an e-mail or a LinkedIn InMail if you’d like a list of them all.)

In that spirit I offer the Deadly Sins of Incentive Compensation. And I’m looking for your input: What are your “favorite” incentive compensation mistakes? The ones most likely to cause a plan to fail to achieve its purposes? Here are a few already on my list, about either how a plan is designed, or how it’s delivered:

Tying compensation to metrics that the recipient doesn’t or can’t control
Too much in “all-or-nothing” bonuses
Changing the plan significantly every year, or even more frequently
Communicating next year’s comp plan details before the current year is over

The timing is ideal for this effort, since this is the time of year when December 31 companies are preparing their plans for the upcoming year. So don’t be shy – send me your favorites, and let’s have some yearend fun! And have a great Thanksgiving!

“Painting with Numbers” is my effort to get people to focus on making numbers understandable. I welcome your feedback and your favorite examples. Follow me on twitter at @RandallBolten.