Incentives influence behaviour. At one level I don’t believe there is much controversy with this statement. We have all witnessed the way a child will show restraint from carrying out a misdemeanour when promised some form of treat. But apply the statement to the workplace and does the statement hold? The answer is yes, but perhaps not the behaviours we were hoping for.
The context here is that I work in an industry where incentives are very much the norm when it comes to structuring remuneration. A total compensation package will often be formed of a base salary and a year-end bonus, the level of which is often linked to performance of some kind. The incentive part I refer to here is essentially the conditional element of remuneration – ‘you do x and I will pay you an additional £y’. Within the financial services industry the targets underpinning the conditional elements can vary significantly. They can be directly linked to a measure, such as investment performance, revenue or asset growth or can be broadly discretionary in nature, for example, based on a 360-degree annual review. Similarly, the amount paid can be transparently expressed – for example, you are paid a certain percentage for every incremental £x of revenue brought in or outperformed relative to benchmark. Or the amount paid can be vague and perhaps linked to the overall success of the organisation or team.
In the wake of the global financial crisis, these compensation systems were scrutinised by regulators. In particular there was a concern that bankers and investment managers were being compensated for taking excess risk with client money. Regulation and codes of best practice followed as a result; for instance, in MiFID II across European jurisdictions and locally applied, such as the FCA’s Remuneration Codes in the UK.
The rules seek to identify those people who either face a significant conflict of interest or are in a position to do harm by excessive risk-taking. Once identified, additional restrictions would apply to those individuals, including controlling the balance of base and variable pay; the composition of the variable in cash/equity; the time horizon over which the variable compensation vests to the individual and potential claw-back provisions in the event of rule breaches.
So, a relatively simple concept of giving a carrot (or saving the stick!) is now potentially very complex and likely to involve the examination of multiple variables. With complexity, it begs the question does it achieve the desired effect or, indeed, as first mooted does it encourage behaviours that ideally are to be avoided?
I have experienced a range of variable incentive schemes across the firms in which I have worked. Most have been largely discretionary in nature, so biased towards annual feedback. Others have been geared around achieving a certain level of revenue growth. Most interestingly, however, have been those environments when there has been a change to the structure and to witness the change in behaviours when the new system is introduced. When targets become based around the individual, tangible and financial, I have found that people who would ordinarily share information and cooperate become more guarded in their interactions and the team dynamic becomes more strained. Whilst productivity may increase (another moot point), there is certainly an increase in the level of debate about which account belongs to who and arguments over whether someone deserves credit for their input to a client win!
I have often wondered why firms go through the annual charade of the bonus review – and the time consuming process it involves – and pondered whether we would see equivalent or potentially higher levels of productivity and employee satisfaction if we simply paid a base amount commensurate to the individual’s worth in the organisation.
The often-used case study for this approach is Netflix which in a 126 slide presentation “Neflix Culture: Freedom & Responsibility” discusses their approach to HR including their view on bonuses. As stated by Patty McCord, the Netflix Chief Talent Officer at the time, in an HBR article “Netflix didn’t pay performance bonuses, because we believed that they’re unnecessary if you hire the right people. If your employees are fully formed adults who put the company first, an annual bonus won’t make them work harder or smarter.”
I suppose this is yet another issue that points back to corporate culture. If you are bold with your culture, there is greater scope to gain employee buy-in different ideas such as the very hot topic of compensation. I appreciate the status quo is difficult to break, but with so many bright brains in the industry there must be someone who can innovate for a better way.