
Stop Paying Executives for Performance (2016) - mark_edward
https://hbr.org/2016/02/stop-paying-executives-for-performance
======
coldcode
I got my first job because the director of the IT organization had some
incentive to show lowered expenses so he routinely laid people off near the
end of the year and then desperately hired new ones at the start of the next.
Somehow the math worked out for him. This was a long time ago though.

~~~
Spooky23
I know a guy who collects people as layoff fodder at a bank.

He finds a group that is tenuously related to what he does, uses bureaucrat-
kungfu to take them on, then uses them when the next 10% layoff comes. So he
protects his core team that generates his bonus, and gets the extra bonus for
firing people.

------
pella
by Nassim Taleb

"4\. Do not let someone making an “incentive” bonus manage a nuclear plant –
or your financial risks. Odds are he would cut every corner on safety to show
“profits” while claiming to be “conservative”. Bonuses do not accommodate the
hidden risks of blow-ups. It is the asymmetry of the bonus system that got us
here. No incentives without disincentives: capitalism is about rewards and
punishments, not just rewards. "

from: "Ten principles for a Black Swan-proof world (2009)"

[https://www.ft.com/content/5d5aa24e-23a4-11de-996a-00144feab...](https://www.ft.com/content/5d5aa24e-23a4-11de-996a-00144feabdc0)

~~~
aaronchall
The balanced scorecard provides a way to manage non-financial measures of
performance, and incentivize long-run measures.

[https://en.wikipedia.org/wiki/Balanced_scorecard](https://en.wikipedia.org/wiki/Balanced_scorecard)

If you measure the result of independent inspections and auditors on the
executives' scorecard, don't be surprised if you get a financially healthier
long run management of the firm.

I think at some point Taleb was learning the math and theory behind
statistics, and then decided it was time to stop learning.

~~~
badsock
That seems better than judging performance based on a single metric, but still
wide open to gaming.

In my experience, it's better to use your full range of objective and
subjective facilities to select a good manager, and then trusting them until
it's time to re-evaluate (using the same means but now with more evidence of
their performance).

An organization that runs on extrinsic motivations can only ever be mediocre
at best (and often worse), and there's very little that kills intrinsic
motivation more than putting people into systems designed reduce a human's
potential to a number (or several numbers in the case of your balanced
scorecard).

------
pluma
It's not paying people for performance that's the problem, it's paying them
based on metrics.

When you incentivise people to optimize metrics, they will optimise the
metrics. But the metrics are probably only intended as a stand-in for
something that's harder or even impossible to quantify.

This applies to every profession.

If you pay programmers based on the lines of code they write, programmers will
write more lines of code. But what you were probably trying to pay them for
was productivity -- instead you may have ended up paying them for verbosity.

This is basically the Cobra Effect:
[https://en.wikipedia.org/wiki/Cobra_effect](https://en.wikipedia.org/wiki/Cobra_effect)

~~~
JamesBarney
How do you contractually pay someone for performance without relying on
metrics?

~~~
fian
Don't tie bonuses to individual contributions. Individuals will work to meet
their individual KPIs/metrics often to the detriment of the organisation.

If every employee gets a bonus based on the organisational performance then
there is a greater incentive for team work and cooperation within the
organisation.

I previously worked in a company with this policy. It meant the receptionist
got the same bonus as the Principal Engineers. That policy might make some
people unhappy if they think they deserve more compensation because they are
more educated / smarter / experienced in a specialty. The thing is, the admin
ans support staff worked hard to make the place run smoothly. The engineers
were almost completely unburdened with flight, accommodation or training
bookings. IT equipment was procured and commissioned in days, not
weeks/months. If someone was roadblocked, the organisation worked to remove
the roadblock.

It was the best company I have ever worked for. Sadly, the company was
acquired and the cooperative culture died after a few years.

Other places I have worked are in contrast much more mercenary. Individual
performance is measured and used to determine compensation and promotion.
Individuals and internal teams actively compete with each other resulting in
significant inefficiency. Internal politics dominate business making
decisions.

You can still measure performance against KPIs but not tie it to individual
compensation. Instead use the metrics to analyse where there might be
opportunities for improving efficiency through restructuring / training.

~~~
dhimes
Do you think that this successful bonus strategy would work if it was done as
profit-sharing rather than bonus? I guess it is kind of the same thing, but
there might be subtle differences. I don't know much about this area but I was
always impressed by Balsmiq's profit-sharing ideas.

~~~
fian
In some sense it is a profit sharing strategy. The owners will still have
strategic spending goals for profits (growth, R&D, acquisition etc). Also,
depending on how long the company has been around, the owners may also have to
pay down debts taken out to start/grow the company.

That must be balanced against ensuring employees are adequately compensated vs
the local market expectations.

------
edblarney
Maybe a much longer window in the equity would be a better idea.

Instead of vest over 4 years - vest over 10 years, with the bulk of them
later.

This way they know they have to create long term value.

~~~
Noseshine
No, that would not work any better. Who is going to be that god-like genius to
disentangle cause and effect of an individual person's actions anyway, and now
even in the long run? In an environment where no experiments or tests are
possible, because the chosen path is the only path we will ever know.

~~~
sokoloff
For an executive, I don't care tracking cause and effect of their individual
actions. I care about the aggregate outcome for stakeholders (shareholders,
customers, and employees).

Whether 13 weeks of paid parental leave or this healthcare plan vs that one or
this change to the telecommuting rules that they advocated for is irrelevant.
Did the company succeed and thrive and serve its stakeholders?

One measure that I've seen recently (and like) is "compounded growth rate,
over 6-10 years, of the 3 year moving average of stock price" from grant to
payout date, subject to minimum thresholds [so you're not just paying for
ordinary market growth].

That measure is also imperfect, but it seems less imperfect than others.
(Disclosure: the company I work for adopted such a plan last year, so we won't
know how it really plays out for at least 5.5 more years. Edit: program
summary here:
[http://ir.cimpress.com/mobile.view?c=188894&v=202&d=3&id=aHR...](http://ir.cimpress.com/mobile.view?c=188894&v=202&d=3&id=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTEwOTIzNDE5JkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3)
)

~~~
Noseshine

      For an executive, I don't care tracking cause and
      effect of their individual actions.
    

So you want to pay executives but not based on how THEY actually did as
individuals, but on a group basis?

That is a truly innovative bonus system. Excuse the sarcasm, you invited it.

In case you meant something else than me, you replied to my comment that was a
reply to one very specific comment, and I obviously assume we are still on
that topic. In that context your reply "I don't care how the individual does"
is strange at the very least.

EDIT:

Ah I get it, but it does not make any more sense because if you assumed I
meant the actions of the executive on a Tuesday at 2 pm in September instead
of his whole reign than I don't understand how one can come up with such an
interpretation. Reminds me of the topic submitted one or two days ago of that
investor person who didn't want to say anything in public any more to not have
to have exactly these kinds of ridiculous misinterpretations to deal with.

You _cannot_ say if it was that specific individuals actions specifically that
caused success! Not even if the executive is CEO for 30 years. It has been
shown again and again that such successful executives, when placed into a
different environment suddenly fail. Because it isn't _just them_ , it is the
_whole environment_ that caused their success.

~~~
sokoloff
>So you want to pay executives but not based on how THEY actually did as
individuals, but on a group basis?

>That is a truly innovative bonus system. Excuse the sarcasm, you invited it.

Yes, that is _exactly_ what I want to do. As a customer, shareholder, or
employee, I don't care if it was Bill the COO's execution or Jane the CEO's
vision and strategy caused the company to succeed; I care the company
succeeded.

It is "all for one and one for all".

> In case you meant something else than me, you replied to my comment that was
> a reply to one very specific comment, and I obviously assume we are still on
> that topic.

I also assumed that. We adopted a similarly structured program as edblarney
contemplated, summarized here:
[http://ir.cimpress.com/mobile.view?c=188894&v=202&d=3&id=aHR...](http://ir.cimpress.com/mobile.view?c=188894&v=202&d=3&id=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTEwOTIzNDE5JkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3)

Your text was clear that it was "individual person's actions". I did not
misread that as "what they had for lunch on a random Tuesday".

I'm sorry that you are frustrated by "exactly these kinds of ridiculous
misinterpretations" in this thread. I don't think they are with the person you
think though.

------
blazespin
Doesn't this article contradict itself? On one hand, the article quotes some
guy who says his work isn't influenced by bonuses and then just a few
sentences later it says the danger of bonuses is that they influence risky
behavior.

Which is it?

~~~
Noseshine
So we have

1) _" his work isn't influenced by bonuses"_

2) _" the danger of bonuses is that they influence risky behavior"_

I see two statements - but I don't see a contradiction.

    
    
      Which is it?
    

They are independent of one another?

~~~
ffggvv
Exactly. They influence but not in a good way.

~~~
Noseshine
Now _that_ is a contradiction: You say "exactly" to then claim the exact
opposite?

How do they interact? I said - and still say - those are completely
independent statements.

How does 1) have any influence on 2)? If that individuals work is or isn't
influenced by bonuses the general statement 2) changes somehow? Magically? Or
vide versa, the same. No connection. No matter what you think of 2), the
personal statement 1) is right or wrong independent of 2).

------
known
There is no intrinsic motivation.
[http://researchnews.osu.edu/archive/inmotiv.htm](http://researchnews.osu.edu/archive/inmotiv.htm)

~~~
mdorazio
You're making a rather sweeping statement based on the opinion of a single
professor. A quick Google Scholar search will show you that the vast majority
of research on motivation still shows that intrinsic motivation very much
exists. It's just our definitions of extrinsic vs. intrinsic and the
recognition of how the two interact that are changing slightly. See, for
example, [1][2][3].

[1]
[http://www.sciencedirect.com/science/article/pii/S0361476X99...](http://www.sciencedirect.com/science/article/pii/S0361476X99910202)

[2]
[http://psycnet.apa.org/journals/amp/55/1/68/](http://psycnet.apa.org/journals/amp/55/1/68/)

[3]
[http://psycnet.apa.org/journals/bul/125/6/627/](http://psycnet.apa.org/journals/bul/125/6/627/)

