News AGX SolutionsBack

Does the Bonus really lever results? At what cost?

A lot have been written regarding the variable remuneration. The bonus, an additional value to the wage, normally linked to results is a normal procedure nowadays. Commonly called of variable remuneration percentage, it can represent real fortunes for the companies’ executives, depending on the economical moment.

The philosophy that supports this process is based on the companies’ need of leverage in short time. The allegation is that with this, the executives’ motivation increases and the corporate objectives will be reached.

KPIs* are defined and linked to the professional's acting indicators.

The definition of these KPIs depends on the companies’ needs.

On this way a chain of indicators is settle down that should assure to the enterprise obtaining the expected results and put in place the constant evolution cycle, so necessary today.

The reality however, as almost everything, differs of the theory and is there where the problems begin.

Companies are formed by people and usually who defines the indicators also has indicators to reach to get their own bonuses.

If an executive presses their subordinate's objective, he assures that his targets will be reached. It means that going down on the organization structure, the same indicator is increased at least 0, 5 to 1% in the result to be reached in each level going down...

It is common in many companies conflicting indicators for the board of directors. Example: Production Director has conflicting targets with Human Resources Director, that has conflicting targets with Quality Director…., without speaking in Purchases, Sales and Financial. 

The application of indicators of this nature and their corporation’s success or failure also depends directly on their executives' maturity. They usually represent significant values of the executive's wage. It is not rare to find companies where the amount can arrive to an additional of 50% or in some cases even more, for the main executive.

Depending on as this professional drives his personal life, the application of the indicators and search for results can run in deferent ways:

Get the result independent of the cost!

Depending on the financial condition, debt and the executive's habits, a lot of times he assumes the posture of looking for reaching his indicators at any cost, passing over his pairs, creating difficulties to the ones that have conflicting objectives with his ones, pressing his team in excess, etc. It is even worst when the executive puts the value inside of his personal budget. Getting it becomes a huge priority (first one?) to him. He has no option, he has to get it. He is totally focused on it, which not always leads his team in the desired direction that the company really needs. As examples, a human resources director can, in search of reaching his indicators, arrive in mining the organization’s internal climate, instead of providing constant evolution cycle. A quality man can, in the search for zero defects, to block the company. A production man in search of production records can give up the quality, and so on.

Usually the consequences for the organization are more negative than positive.

Unhappily this is the most common situation in most part of the companies.

Not to give importance to the goals to be reached.

Personal objectives very difficult of reaching normally forces the professional not to give importance to the same ones. He normally assumes beforehand that the established goals won't be reached. With this attitude he will not obtain from his team what they are really capable to do. This generates a company rhythm in an under expected level and generates conflicts with the other areas that many times depend on these indicators in order to assure their own ones. The internal climate once again is affected generating conflicts among areas and among managers.

When the bonuses are not well distributed.

There are cases in companies that work in projects mode that just the project’s manager is that the one that receives bonus. His project team, usually composed of functional subordination people receives nothing, however they are who really assure the effective actions in place that will get or loss the manager’s established indicators. The success or failure for the company’s climate in this case is directly in the project manager's hand and it is practically impossible not to generate a huge decrease in team motivation.

Variable remuneration as a percentage of the company’s revenue.

We know situations where the main executive receives his variable salary as a percentage of the company’s revenue. Indicators incorrectly established allow to the main manager to receive true fortunes even with bad results, what implement in the whole company a widespread disbelief.

We could stay here talking about this and mention countless situations where the application of bonuses has opposite results compared to the corporations’ objectives. I am not against to the variable wage. Remuneration based in performance is something primordial in all companies.

As the following sentence says:

There is nothing more unjust than to treat different people in identical way,

The best performance must be better remunerated.

The companies must to evaluate their rules and the establishment of their individual and collective performance indicators in order to assure a healthy application of the performance’s based remuneration,and with this to obtain success in the application.

These bonuses programs need to pass through a revision in their rules, including the percentage of variable wage in the great majority of the organizations. The Human Resources Department in these cases has the mission to revise the programs in order to have a trustful and fare system running. They must inform and negotiate these issues with superior spheres of the companies, where usually these subjects are defined.

They must be lessened and respected by upper management.

As everything in life, always someone will be unhappy but a rational application can come to benefit most of the employees and really to lever results instead of put people down in their motivation and get results under expected at high cost as we see today in many national and multinational companies.

Alfonso Gravalos 

• KPIs = Key Performance Indicators