Incentives and bonuses are top of mind for many business owners and managers.
Basic business theory will tell you that these incentives and bonuses are often the best way to instill enthusiasm and motivation into your employees and therefore should be encouraged.
However, before you begin handing out a shiny Christmas bonus or milestone reward, it’s important to know that while this incentive rationale is true on the surface, often, incentives and bonuses can actually create a negative outcome.
Unfortunately, many incentives are so focused on achieving a particular result that they can encourage a “by any means necessary” mentality, resulting in the wrong behaviour.
As a business leader or manager, it’s crucial to ask yourself: are your incentives leading to the right results? Are your bonuses promoting behaviour that is ultimately detrimental to your business?
In this article, we’ll explore the common pitfalls of misguided incentives and bonus schemes and offer some actionable solutions and frameworks to use moving forward.
The unforeseen issue with incentives and bonuses
Incentives and bonuses, when not properly constructed, can inadvertently promote behaviour that runs counter to your organisation’s goals and ethics.
We’ve all seen those movies where a group of people in a race are competing for some amazing sum of prize money. Without any defined rules or reason to consider the well-being of others, some (if not all) may be tempted to do whatever it takes to win, even if that means something as heinous as pushing aside anyone or anything in their way to secure the lead. The money prize strategy might result in a short-term victory, but it completely disregards the values of fairness and respect, which can then tarnish the reputation of the race and its participants.
Similarly, when business incentives or bonus packages prioritise individual gain over the collective well-being of your organisation and its people, you potentially risk encouraging your employees to engage in unethical or counterproductive behaviour.
To understand this better, let’s dive into a real-world example.
Australia’s Banking Royal Commission
During the Banking Royal Commission in Australia which ran from 2017 to 2019, it became clear that many banks adopted a bonus system that rewarded employees based on the number of accounts each individual was able to open.
The rationale was simple: more accounts increased revenue.
However, in practice, this led to a catastrophic result.
Bank employees, driven by the promise of large bonuses, opened fictitious accounts for unsuspecting customers without their knowledge to secure their financial rewards.
This scandalous behaviour not only damaged the reputation of the banking industry in Australia but also unveiled the downside of an incentive structure that prioritises hard quantities over qualitative variables like consent.
A practical incentive and bonus solution
So, how can an organisation rectify the misalignment of incentives and bonuses?
Let’s examine a scenario that the team at Dexterous recently encountered.
A particular CFO noticed that despite his company’s success, the head salesperson at the company was making the rest of the team miserable. Driven by a bonus structure that solely rewarded revenue generation, the salesperson was consistently sourcing clients with minimal or no margin, and clients notorious for not paying their bills. This undermined the quality of the business’ client base and created more clean-up work on the back end for other team members.
Realising that the existing bonus structure was promoting unethical behaviour and jeopardising the company’s overall health, the CFO initiated a thorough review and modification of the Key Performance Indicators (KPIs) for the management team. This realignment was implemented to ensure that the company’s incentive structure was not in conflict with the company’s objectives and considered factors such as client satisfaction, margin contribution, and adherence to the company’s core values.
Very quickly, this change not only improved the work environment but also enhanced the company’s financial stability.
How to implement effective incentive and bonus structures
Here are some key takeaways to ensure that the incentives and bonuses your business implements remain aligned with your organisation’s goals and values.
Don’t silo incentives
It’s important not to tackle different incentives and bonuses within an organisation as stand-alone measures. Instead, ensure that each different bonus is part of a pre-designed integrated strategy that aligns with the broader goals of your organisation.
Similarly, avoid implementing incentive structures that have one isolated goal; instead, operate with a broader lens and consider how they might influence teamwork, ethics, and overall company culture.
Before introducing or modifying incentive or bonus programs, engage in a financial discussion and consider company data to ensure that your organisation can comfortably sustain them without compromising its financial health.
Consider every dimension
When designing incentives and bonuses, consider every dimension of employee performance, including ethical behaviour and teamwork. Also, do not neglect the long-term impact these incentives or bonuses may have on the organisation.
Are you struggling to implement well-rounded, positive incentives? Dexterous can help.
Incentives and bonuses are a fantastic way to encourage growth. However, you have to make sure that they are established correctly, otherwise, negative consequences can quickly creep up on your business.
That’s where our team of specialists can help.
At Dexterous, we provide an outsourced, customisable finance department solution that works for you.
We can leverage our industry experience and financial expertise to help you design and implement a productive incentive and bonus strategy for your business that avoids the common pitfalls we’ve discussed.
Do you want an expert finance team that helps you proactively manage your incentive and bonus strategy?
At Dexterous, we provide a comprehensive managed finance solution.
This means that we leverage all the latest business tools, access global talent and manage your company’s bonus structure with the local expertise of our Sydney team.
We also equip you with a strategic approach and cost-effective function not just to address your incentive and bonus issues today, but to maintain an effective strategy that will remain viable amidst the challenges of a potential recession.