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.
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).
The last paragraph of the article answers your question:
"We only half agree: Abundant evidence shows that people
– including top managers – will in fact start to behave
differently if you make a large proportion of their remuneration
dependent on some measure of performance. But it will not be in
a way you want them to behave."
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.
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... )
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.
>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.
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.
One last comment (the edit period closed on my comment above).
I really like the idea of "vest over 4 [-ish] years" but "payout only after a longer period of time has passed" as a way to let people earn the right to the compensation over a reasonable and market competitive period of time, but still keep them properly incentivized to create value over the long-run, not micro-optimize quarterly or annual results.
I think that would be fine. I'm not trying to prevent people from accessing money before the 6 (or 10 or 15) years is up. I'm trying to make sure that the value of the money they access is determined after a long enough period of time has passed to more fairly evaluate their decisions. There will be a cost to borrowing or offsetting their risk and that cost will be determined by arms-length financial arrangements.
My company is too small for anyone to care, but imagine that Apple or Google adopted such a plan. 5 years in, suppose it looks very likely that the Apple PSUs will pay out. I have no problem with an Apple exec borrowing money against their overall earning potential or even borrowing money specifically against the PSU payout.
The payout happens or doesn't based on the smoothed (moving average) judgment of Apple investors' reaction to those decisions and the financial and strategic performance of the company.
(Note that in many companies case, it is prohibited for employees [or a subset of employees] to enter into certain derivative contracts. Most prohibit outright speculation with naked options. Some even prohibit the selling of covered calls. I believe the full paperwork of our plan prohibits pledging these PSUs as collateral for a loan, but that doesn't prevent an underwriter from looking at my overall financial prospects and deciding to lend based on that overall picture.)
That's more of an "in theory" than "in practice" - executive bonuses are almost never clawed back, even retention bonuses in the event of an executive leaving the company.
"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)"
I agree with the first part of that quote, but when it says "No incentives without disincentives" that's where the bankers would argue that there are disincentives, like the "performance culture" (firing the bottom performing 10% etc). I would disagree with them (the bottom 10% may just be more aligned with reality, or considering the long term for example) but these guys are slippery and will find any means necessary to justify this behaviour.
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.
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).
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.
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.
Thanks for the link. This theory seems relevant to my own work and motivation.
> A child playing baseball may be satisfying his need for physical exercise, while the professional player is satisfying his parental instinct by providing a good income for his family.
> For children and professionals, baseball is a means to two different ends.
When other people start setting goals for me (and I buy into them), I'm apt to lose motivation, even if the nature of my work remains unchanged. Perspective can be a very powerful tool. I appreciate the nuance provided by this "16 basic desires" theory.
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].
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.
Find a metric that is hard to game and aggregates the results you're interested in driving over a relevant period of time.
"Widgets that sold and had no returns logged" is better than "Widgets that passed QC" is better than "Widgets completed" is better than "Widgets started" for a widget assembly line worker.
Perhaps even better is "long-term profit and sustainability of Widgets, Inc" but that is harder to tie back to the individual widget maker. (A possible metric for the last is "arithmetic average of the share price of Widgets, Inc measured between 9 and 15 years from now", but that's hard to use to motivate someone to make more/better widgets this week.)
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.
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.
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.
37 comments
[ 4.1 ms ] story [ 98.5 ms ] threadWhich is it?
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.
They are independent of one another?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).
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.
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... )
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.
>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...
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.
I really like the idea of "vest over 4 [-ish] years" but "payout only after a longer period of time has passed" as a way to let people earn the right to the compensation over a reasonable and market competitive period of time, but still keep them properly incentivized to create value over the long-run, not micro-optimize quarterly or annual results.
My company is too small for anyone to care, but imagine that Apple or Google adopted such a plan. 5 years in, suppose it looks very likely that the Apple PSUs will pay out. I have no problem with an Apple exec borrowing money against their overall earning potential or even borrowing money specifically against the PSU payout.
The payout happens or doesn't based on the smoothed (moving average) judgment of Apple investors' reaction to those decisions and the financial and strategic performance of the company.
(Note that in many companies case, it is prohibited for employees [or a subset of employees] to enter into certain derivative contracts. Most prohibit outright speculation with naked options. Some even prohibit the selling of covered calls. I believe the full paperwork of our plan prohibits pledging these PSUs as collateral for a loan, but that doesn't prevent an underwriter from looking at my overall financial prospects and deciding to lend based on that overall picture.)
http://www.businessinsider.com/nikesh-arora-keeps-8-million-...
"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://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.
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).
http://www.commondreams.org/views/2009/04/08/ten-principles-...
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.
> A child playing baseball may be satisfying his need for physical exercise, while the professional player is satisfying his parental instinct by providing a good income for his family.
> For children and professionals, baseball is a means to two different ends.
When other people start setting goals for me (and I buy into them), I'm apt to lose motivation, even if the nature of my work remains unchanged. Perspective can be a very powerful tool. I appreciate the nuance provided by this "16 basic desires" theory.
https://explorable.com/16-basic-desires-theory
[1] http://www.sciencedirect.com/science/article/pii/S0361476X99...
[2] http://psycnet.apa.org/journals/amp/55/1/68/
[3] http://psycnet.apa.org/journals/bul/125/6/627/
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
"Widgets that sold and had no returns logged" is better than "Widgets that passed QC" is better than "Widgets completed" is better than "Widgets started" for a widget assembly line worker.
Perhaps even better is "long-term profit and sustainability of Widgets, Inc" but that is harder to tie back to the individual widget maker. (A possible metric for the last is "arithmetic average of the share price of Widgets, Inc measured between 9 and 15 years from now", but that's hard to use to motivate someone to make more/better widgets this week.)
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.
That must be balanced against ensuring employees are adequately compensated vs the local market expectations.
Exactly what happens with benchmarks.