Compensation

If there’s anything more appalling than Wells Fargo creating about 2 million unauthorized retail banking accounts over a five-year period, it’s their cowardly – and self-destructive – announcement that they will eliminate all sales quotas for such products. There are lots of reasons for the fiasco, but having a comp plan tied to account creation not only isn’t one of them, it gives a highly effective management and incentive idea a bad name.

We all know that bad hires are expensive. In fact, that’s become a cliché, and clichés don’t motivate or impress. So in this blog, we look at what a bad hire really costs, in actual dollars. Read on – you might be surprised.

Like the Deadly Sins of Quantation listed in my book, “Painting with Numbers,” the art/science of designing incentive compensation plans has its own Deadly Sins. These Deadly Sins of Incentive Compensation render these very expensive plans useless or even destructive to the enterprise. I have a few of my own, but I’d love to hear your “favorites.”

A Washington Post article, citing this year’s report on the National Assessment of Educational Progress (NAEP), reports that from 2013 to 2015, fourth-grade and eighth-grade math scores declined somewhat nationwide, and were stagnant or slightly down in reading. Are we really doing worse, or are we wasting our time with all this testing?

Last week, we looked at a simple, handwritten graph that’s a great example of what graphs and data visualization are really for – to help people get a sense of trends, patterns, and what behavioral consequences might be. Now let’s use that same approach to understand a typical management-by-objective (MBO) bonus plan for line managers and key employees, and improve a poorly-designed system.

Well-designed incentive compensation plans – especially sales commission plans – are an incredibly powerful way to motivate great performance. But designing a great plan is both an art and a science, and prone to design mistakes that are expensive and end up not motivating the desired performance. The commonest and most serious error plan designers make is to lay out the rules before deciding just what it is the enterprise is trying to accomplish. You can avoid that mistake with a simple, straightforward graph that I’ve drawn hundreds of times in my career.

I love metrics. I love keeping score. And as a lover of metrics, I was delighted by the Bipartisan Policy Center’s announcement yesterday of a new metric: the Healthy Congress Index (HCI)! But as enthusiastic as I am about this new metric to assess the productivity of the U.S. Congress, there’s a fundamental problem that the BPC really needs to address.

In the last post, we discussed a problem related to health insurance subsidies under the Affordable Care Act (ACA) caused by the legislation’s failure to address the impact of significant income fluctuations throughout the year. An approach that could deal with this takes a page from “accelerated” sales commission plans, where commission rates increase as sales volume increases.

Prof. Annette Nellen describes a problematic consequence of the Affordable Care Act (ACA). The problem and some proposed resolutions will resonate with anyone who thinks deeply about designing incentive compensation plans, and illustrates what can happen when our legislators attempt to bake incentives and motivations into the laws they write.

One of the most “boneheaded” incentive scheme design choices is excessive binary-ness. This is a problem in the Affordable Care Act, but it’s also a problem that frequently rears its head in compensation plans. In this post, we look at an example and discuss how to fix it.

The efforts by both the Obama administration and the Republican-controlled Congress to tinker with the employer mandate won’t work. The problem is that the efforts are merely symptoms of what is not only a fundamental flaw in the ACA, but a flaw in many incentive compensation plans: excessively binary schemes.

During a week in which the most hotly debated news topic has been the quality of decision-making by senior federal government officials, my nominee for the worst decision is VA Secretary Eric Shinseki’s parting gesture not only to cancel performance bonuses for senior VA executives, but to ban patient wait time as a measure used in performance evaluations.

The standard realtor commission structure doesn’t motivate the realtor to do his or her best for you. As you read this post and my suggested improvement, think about how this situation relates to the incentive compensation plans in your own enterprise, and why incentive compensation is such a delicate art.

Developing scorekeeping metrics is a critically important yet undervalued role of the chief financial officer. CFOs ignore this role at their and their organizations’ peril, because if they don’t set the scorekeeping metrics, others will, and will make a mess of it.

In high-tech companies, and especially in the software industry, business models are becoming increasingly varied and exotic. That’s especially true in enterprises focused on cloud computing and software-as-a-service (SaaS).

When designing processes and setting goals and objectives, there is always at least some element of moral hazard. That’s why in business and any other walks of life, the players aren’t allowed to be the scorekeepers and vice versa , even though the great majority of us are fundamentally honest and ethical.

In this post, I wear my heart on my sleeve. I am a big fan of the practice of over-assigning sales quotas as part of a company’s annual planning process. It’s a practice that provides reasonable breathing room for people at all levels in the company, and protects sales management from its own aggressiveness and over-optimism.

Accelerated compensation plans are those where the commission rate increases as the recipient’s performance against quota increases. They are a powerful motivational and sales management tool, especially for earlier-stage companies where a relatively small number of big deals can make a huge difference.

When I posted “Boneheaded Compensation Plans #1” three months ago (12/19/08), I commented that the “#1″ was appropriate in the title because this would definitely be a recurring topic. And I was right.

Just the other day a senior corporate executive reminded us why much of the public thinks of corporate executives as not only greedy, but also contemptuous of the public’s intelligence.

In a New York Times op-ed piece this morning, Paul Krugman rails about the excessive compensation that “Wall Street” has extracted from the economy over the last few years. He makes the interesting observation that over the last few years, the share of GDP going to the finance sector has risen from 5% to 8%.

Well, are they? Should stock options be valued, and treated as an operating expense to be run through the company’s income statement? The accounting issue was “settled” a few years ago by GAAP statement FAS 123R, which requires companies to “expense” stock options.

I met with a Lucidity client this week, and the topic was incentive compensation plans – you know, sales commissions, executive incentive plans, MBO plans, marketing bonuses, engineering project completion bonuses, etc. – where some portion of the employees’ pay is dependent on performance, effort, or results.

Phred Dvorak recently wrote an excellent article on executive compensation disclosures in public company proxy statements (WSJ, 3/21/08). Her main theme was that in the face of SEC requirements for fuller disclosure of executive compensation, companies have provided so much additional verbiage that normal humans can no longer make any sense of the disclosures. Amen.