Incentive schemes are a minefield – how do you get them right?
In general people will do what they are paid to do – and the same applies with any bonus structure – the most critical thing is ‘the measures’
I was lucky enough to do some work with an expert on incentive schemes a few years ago. He had loads of examples where they had gone wrong because the measures hadn’t been thought through and didn’t fit with what the company actually wanted to achieve. A good example was the luggage handlers at Heathrow where they measured how long it took to get the first bag off the plane onto the carousel. Easy to see that they only needed a fit, younger lad to grab the first small bag and leg it across the tarmac to qualify for their bonus – the rest of the bags could come off at a more leisurely pace!
Steven Hester is being lambasted – but it is a bit late now when his objectives and measures should have been set in place over a year ago – that was the time to object and get it right. We should now be interested in what his priorities are for 2012 (and beyond of course).
If his measures had been to become a small business lending champion and see that part of the economy invigorated, fuelled by RBS lending, and he had acheived that, then he would now be a hero. We might still have an ideological objection to the scale of the bonus but we could see that he had created the value to justify it it would have a positive feel.
As it was the country, as the majority shareholders, had it decided for them that the corporate priority was restructuring and downsizing – which he has, by all accounts, done well and against the measures set is now qualifiying for the bonus decided as appropriate, probably about two years ago (with consent of all the policiticians now up in arms about it!). However this all has negative connotations for the economy, so it doesn’t feel right. Some shouts have gone up about the fact that he is getting a bonus even though the share price has gone down – well, if that is the case then that should have also been one of his key measures (except it could be argued that the share price is just as much influenced by external factors).
Many smaller businesses face the same challenge on a different scale. The most obvious one is where you incentive your sales staff to sell more but they can do that at the expense of your gross margin – so you incentivise your staff to wreck the business.
So – get the measures right in line with what you want to achieve, look at what could go wrong and provide against it, then align the bonus against those measures – the amount you then have to pay depends on the going rate and how motivated you want someone to be.