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SUMMARY:
The personal incentive was heavily emphasized in the 1980s business culture in the United States and around the world, based on the belief that highly driven individuals could influence organizations and communities. Gordon Gekko in Wall Street was the most extreme example in film, claiming that greed was a positive thing. In the 1990s, however, organizations were traumatized and bankrupted as a result of the improper use of remuneration as a motivator. Despite this, huge business achievements have been founded on remuneration based on performance…
The personal incentive was heavily emphasized in the 1980s business culture in the United States and around the world, based on the belief that highly driven individuals could influence organizations and communities. Gordon Gekko in Wall Street was the most extreme example in film, claiming that greed was a positive thing.
In the 1990s, however, organizations were traumatized and bankrupted as a result of the improper use of remuneration as a motivator. Recently, Phones4U and Allied Dunbar in the financial services business are two examples.
Individual traders at the infamous Barings Bank were paid millions in incentives, yet these highly motivated people failed to meet the company’s long-term goals.
Furthermore, even if an individual’s incentive system is based on perfectly adequate performance metrics that result in the organization’s success and he or she gets rewarded, there may still be issues originating from the enormous pay gap between senior and middle management. It’s possible that a payment system that depresses or demotivates ten workers for everyone it inspires isn’t the ideal option for the company.
Wise businesses strive to reward and encourage all employees so that they work tirelessly to advance the company’s short and long-term goals and feel treated properly. However, the link between the products for which they are being awarded and the activities they can do to impact the desired outcome must be adequately established.
A wise company recognizes that:
• The individual manager has a reasonable right to act in his or her own best interests.
• Managers work for people, not organizations, and seek to impress their immediate superiors, or if that fails, their peer group.
• Managers want to succeed and will be drawn to projects where they know they can succeed, usually favoring the short term over the long term.
The obvious implication is that before relying on a remuneration structure to affect performance and behavior, an organization should establish some groundwork. In other words, the remuneration system must be balanced with the management and organizational system.
There are five essential prerequisites for establishing a successful reward scheme.
1. Measurement: “You won’t obtain it unless you measure it.” There are several measuring methods, the most well-known of which is the Balanced Scorecard, which has multiple objectives and is employed by Tesco.
2. Monitoring: If performance metrics are not effectively monitored, or are only monitored in a review at the end of the year, it can send signals to managers that they don’t really matter, or, even worse, that failure is okay if all of the managers fail at the same time.
3. Job tool control: The organization must ensure that the individual is not overly reliant on things beyond his control in order to meet the performance targets set (this is the “how” portion of the equation).
4. Consistency: Ensuring that short-term organizational issues do not overpower or divert managers from their primary goal. The organization must also guarantee that its own design (whether bureaucratic or loose) is appropriate for the tasks that managers are expected to complete.
5. Alignment of reward and strategy: Achieving a clear plan for an organization is a journey, not an event that will occur in the future. Even if an organization’s strategy is unclear, a remuneration system can be implemented as long as organizational and management conflicts are resolved using strategy and the “balanced scorecard.” Only then will the organization be under pressure to improve its strategy, structure, and remuneration processes.
A checklist of ten characteristics that an effective remuneration and reward structure must achieve is based on these five preconditions:
1. Back up the company’s plan
2. Promote the desired behavior.
3. Recognize and reward appropriate performance
4. Be reasonable 5. Be substantial 6. Be tax-effective.
7. Always be on time (the reward must take place close to the achievement).
8. Include non-monetary incentives (Recognition can be as important as cash)
9. Maintain your composure (A bonus lost through missing a target should not be recoverable, whereas a salary increase should only be delayed until a target is reached)
10. Be absolutely clear.