Aligning Incentives to Results

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A recent Wall Street Journal article by Joann Lublin, Semiannual Bonuses Gain Traction, discusses the pros and cons of what seems to be a growing trend - replacing the annual bonus processes with the establishment and operation of semiannual goals and benefits.

The Hay Group found 50 big and medium companies including Home Depot, Cisco and Xerox who have semiannual programs. The Obama administration's pay czar, Kenneth Feinberg and a Harvard law professor who heads the school's corporate governance program, Lucian Bebchuk says that 6 months is not long enough. I beg to differ.

Here's why I disagree. I've been a manager in a startup where I was chartered to establish the sales compensation plan for a crackerjack sales team where the company had no products. Did we hire before we should have? Sales 101 tells you that there will be no sales until the sales team is in place. The company had a plan and what looked like to me to be the resources to deliver a product in only few months. Timing was everything. For that reason, we designed our program to incentivize the sales team to drive to milestones and ultimately win carrier acceptance of our product.

In this case, an annual goal would have been totally ludicrous, except to satisfy the VCs on the board that we were setup to win. However, as Sales VP I could never predict what we were capable of selling because the product could not be delivered yet for customer or carrier evaluation. I couldn't realistically forecast what the carriers would/should deploy. So, we organized our incentive plan around sales process milestones for that period.

In the times managers face today, of rapidly changing economic conditions, compressed product lifecycles and global competition so much of a business' actual performance is beyond the manager's control. Are we in recovery? recession?

Incentives should work to focus the manager's mind and reward them when goals are achieved. It's not very incentivizing to give the manager what is in effect a lottery ticket, over which they have no control and no way to make a difference in their firm's results. It is incentivizing to give a manager a reasonable goal that they can achieve with effort. Semiannual goals also require semiannual goal setting. Setting goals too high can be more easily adjusted and setting goals too low can equally be easily adjusted higher.