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Tag Archive for 'Bonus'

Super Bowl, Oscars and Olympics

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I was a bit puzzled regarding the reasons why my blog has seen a significant increase in traffic over the past few days. Upon reviewing the keywords used by my readers to find LeapComp, I realized that there were 3 old posts in particular that were getting a lot of attention.

Super Bowl XLIV:
I wrote my first Super Bowl post last year with an analysis of how much football players participating to the Super Bowl received in bonus ever since the first Super Bowl. With yesterday’s great performance of the New Orleans Saints against the Indianapolis Colds, many people are intrigued by the player’s bonus once again.

Oscars:
But the Super Bowl was not the only thing on my reader’s mind. With the Oscar season quickly approaching, and with great movies in 2010 such as Avatar, District 9, Inglourious Basterds, and Up, my article about how much Oscars are worth is also seeing a surge in popularity.

2010 Winter Olympics
And that’s not all the excitement. On top of the Oscars and the Super Bowl, the 2010 Winter Olympics in Vancouver are starting in a few days on February 12. My article “Olympics Pay-for-Performance, Cash-for-Medals” was a hit when I wrote it two years ago, and it is still a hit this week.

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Super Bowl 43 (XLIII) and Bonus Incentives

Super Bowl 43 (XLIII) and Bonus Incentives

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I’m sitting at home looking at the count down for the Super Bowl to start. Not because I’m a particularly big fan of the Steelers or of the Cardinals, but because many people asked me if I was going to watch it and I needed to find out when it was going to be on TV. I often get asked what is the biggest challenge for me to work in the United States. My answer is: “converting Celsius to Fahrenheit, crossing US customs, and talking about football”. As a consultant, you can’t underestimate the importance of being able to do small talk with clients.

During the Olympics, I wrote a very popular post about incentive compensation for Olympic athletes. We found out that the United States paid $25,000 for a gold, $15,000 for a silver and $10,000 for a bronze. Notice how there is no monetary incentive for athletes who didn’t win any medal.  I was thinking, surely Super Bowl winners must have an incentive to win as well; and there is. I found out the historical bonus payouts here.

Super Bowl - Winner/Loser
I - $15,000/$7,500
II - $15,000/$7,500
III - $15,000/$7,500
IV - $15,000/$7,500
V - $15,000/$7,500
VI - $15,000/$7,500
VII - $15,000/$7,500
VIII - $15,000/$7,500
IX - $15,000/$7,500
X - $15,000/$7,500
XI - $15,000/$7,500
XII - $18,000/$9,000
XIII - $18,000/$9,000
XIV - $18,000/$9,000
XV - $18,000/$9,000
XVI - $18,000/$9,000
XVII - $36,000/$18,000
XVIII - $36,000/$18,000
XIX - $36,000/$18,000
XX - $36,000/$18,000
XXI - $36,000/$18,000
XXII - $36,000/$18,000
XXIII - $36,000/$18,000
XXIV - $36,000/$18,000
XXV - $36,000/$18,000
XXVI - $36,000/$18,000
XXVII - $36,000/$18,000
XXVIII - $38,000/$23,500
XXIX - $42,000/$26,000
XXX - $42,000/$27,000
XXXI - $48,000/$29,000
XXXII - $48,000/$29,000
XXXIII - $53,000/$32,500
XXXIV - $58,000/$33,000
XXXV - $58,000/$34,500
XXXVI - $63,000/$34,500
XXXVII - $63,000/$35,000
XXXVIII - $68,000/$36,500
XXXIX - $68,000/$36,500
XL - $73,000/$38,000
XLI - $73,000/$38,000
XLII - $78,000/$40,000

It’s interesting to see that winners AND losers will earn some money. Every player will receive a minimum of $40,000. With around 52 players on each team, the total bonus amount will exceed 6 million dollars! But in perspective, that’s not so bad…

Interestingly enough, the Steelers had the highest median salary in the NFL at $1.1 million in 2006. The NFL’s average salary in 2006 was 1.4 million.  Since that no matter if a player wins or loses he is sure to take home $40,000, the monetary incentive to win is “only” an additional $40,000… in other words, only an average of a 3% bonus over his base salary.

I’m sure the majority of the players don’t even think about such a “small” incentive during the Super Bowl. If the bonus was bigger, maybe they would think about it more, but even if they did, I doubt it would make a big difference. It’s hard to imagine that anyone making it this far won’t give their 100% during the game.

So if the bonus probably does not affect the outcome, why have it in the first place?  Because that’s how it has been for the past 43 years.  But is that a good reason?

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Commission, Bonus or Entitlement?

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Commissions and bonuses should be mechanisms to reward outstanding performance, a certain behavior, and concrete outcomes.  They are likely to fail when they become perceived as an entitlement, which means they are no longer considered as a special reward.  Eventually, the organization might decide to take away that “entitlement” to reinstate it as a reward – the way it was intended to be – but that’s when employees are likely to react in a very negative way.

I learned this very early on when I had just graduated from University.  Almost as soon as I graduated, I bought a small 3 bedroom townhouse, and I rented one of the rooms to a guy I’ll call Joe (this is a fictional name so he won’t try to sue me for defamation).  After living with Joe for several months, I got tired of seeing his dirty dishes, clothes on the floor, and I also wanted to encourage him to do his share of the housekeeping.

So I told Joe, “I know that you don’t really care about keeping the house very clean, and since you are paying me for rent, I can’t really force you to clean up after yourself, but I really wish the house was cleaner.”  So here was my proposition: “How would $50 off your monthly rent incite you to keep the house clean”.  Right away he said “Of course!  Great idea!”  So we sat down and made a list detailing the responsibilities and schedule for the various housekeeping activities, including day-to-day expectations.

The house was clean for the first month, and I gave Joe 50$ back for that month.  Joe wrote me post-dated checks with the new amount for the rest of the year.  The only problem is that in the second month, he started to slip some tasks.  On the 3rd month, many items on the list were being ignored.  On the 4th month, it’s just like if we did not have a list.

On the 4th month I said “Joe, our agreement is obviously not working, please give me the $50 you owe me”.  I probably should have said something sooner, but I did not, and this resulted in a big fight.  Joe started to look for a new place the next month; not because I kicked him out, but because he was no longer happy.
I learned with this one “employee” and one “reward plan” that it is important to set clear expectations (clean up after himself), offer constant performance feedback, and to make sure it stays clear that the payment (reduced rent) is only something that will take place upon meeting these expectations and performance level.  As I discussed before, set clear performance indicators (KPI), and ensure that they are measurable objectives.  Following this advice will help keeping employees happy and potentially increase the retention rate.

There are many real-life professional examples of rewards being taken away, particularly now with the economic challenges, causing employees to react.  This ranges from Google taking out their “free food” program, to many companies getting rid of their share purchase programs.

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Is (Incentive) Compensation a Villain Of the Credit Crisis

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Is Compensation a Villain Of the Credit Crisis is the title of a recent post on the US Banker website.

“While compensation was not THE cause of the current credit crises it certainly can be viewed as a significant contributor.”

The idea is that today, bank’s incentive compensation plans are mostly based on the current year’s revenues.  However, most trading profits are from revenue streams spanning multiple years.

The authors recommendation is to audit incentive plans to identify and remove features that incent short-term behavior.  He also makes several other recommendations including:

  1. Executives should have significant personal capital at risk
  2. Current cash and long-term reinvestment in the firm should match the firms’ lines of businesses generating its profit
  3. Take back incentives if deals do not go through (only incent when actual profit is made)
  4. Ensure executives understand and take risk ownership
  5. Measure performance for the entire firm
  6. Develop talent from within and build a long-term culture.

Not bad ideas, but I’m sure financial institutions have many very smart people considering this as well.

When I read this article, I was wondering, could compensation really have a significant role in the credit crisis?

Investment bankers earn a lot of money…  A lot of people in the financial sector receive (received?) huge bonuses.  But let’s take for example Lehman Brothers.  In 2006, along with many other investment banks, Lehman Brothers had a stellar year: it paid its average employee $335,441 and reported a fourth-quarter profit of 1 billion.   This is after of course, paying 8.87 billion in salary to its 26,000 employees.  Goldman Sachs has even more ridiculous figures; it paid its 26,400 staff an average of $622,000.  Two years later, Lehman files for bankruptcy.

So, how much can we blame “crazy” compensation versus bad risk management?  I’m not a financial analyst, and I’m not pretending to understand the entire issue…  However it seems logical that a firm such as Goldman Sachs, who paid almost twice as much in average compensation in 2006, should be hit equally hard by the credit crisis as another firm such as Lehman Brothers, if compensation was such a major factor.

Goldman Sachs Performance

Goldman Sachs Performance

It turns out that while Goldman Sachs was affected by the credit crisis, it is not in such a bad shape…  despite having paid its employees more.  And this proves that…  the credit crisis is a very complex problem, and that maybe, maybe compensation is not such a “significant” contributor to the credit crisis.

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Do Big Money Bonuses Really Increase Job Performance?

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I came across an interesting study in the “PsyBlog” about the impact of large bonuses on job performance. In this experiment, professor Dan Ariely went to India and recruited [poor] local people to accomplish several tasks, offering a performance bonus equivalent to up to a month’s salary. In 8 of the 9 tasks, the promise of a large bonus significantly decreased people’s performance.

The summary of the paper on the PsyBlog seemed a bit counter-intuitive. Most companies around the world would most likely not have some flavor of a pay-for-performance program if a bonus was actually decreasing performance.

So what is happening? On one hand, I think that if the bonus is very high, participants could have been really stressed out about the task and not performing as well because of that pressure. It is also possible that performance decreased because participants did not actually believe they would receive the bonus for a variety of reasons – sometimes when only a certain number of people can receive the max bonus, participants feel they don’t have a chance to perform at the required level and behave accordingly. Even if there is no maximum number of participants who can receive the largest bonus, the performance required to get the bonus could be perceived as being unattainable or not worth it.

The relative value of bonuses versus the effort required to obtain them is another factor which could affect the participant’s behavior. If working exceedingly hard is required to get the max bonus but that only a moderate amount of work is required to get a bonus which is only slightly inferior, many participants could be settling for the smaller bonus.

I spent some time looking for other papers on this topic and found a few other possible explanations. The “crowding out” theory supports the hypothesis that incentive pay decreases employees’ motivation to perform up to abilities. The explanation generally given for this is that the introduction of an obligatory amount of output to produce is often considered by employees as a signal of distrust. The papers I found discussing the crowding theory are: Titmuss (1970), Rothe(1970), Gneezy and Rustichini (2000), and McNabb and Whitfield (2003). Papers by Kruse (1992), and Ichniowski and Shaw (2003) “prove” that incentive pay positively affects employees’ effort.

As for me, based on my own observations and “empirical evidence”, I will side with Kruse, Ichniowski and Shaw to say that incentive pay (if used properly) can positively affect employees’ performance.

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Spiffs, Bonuses and Contests - Ask the Expert #3

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In this 3rd installment of David Cichelli’s “Ask the Expert” series on this blog, I asked David about his thoughts on spiffs. I asked him if it was possible to use spiffs while avoiding encouraging employees to push a certain product upon a customer at his or her expenses. I also asked David if there was such a thing as too many spiffs. Previous posts of this series are here and here.

Before going into David’s answer, I want to give a bit of background regarding what is a spiff.

SPIF (or SPIFF) may stand for “Sales Performance Incentive Fund”, “Special Performance Incentive Fund” or ” Special Performance Incentives for Field Force”. The exact origin of the term is open for debate. Wikipedia defines a spiff as a small, immediate bonus for a sale. They can be paid by a munufacturer or the employer, to the salesperson who sold a specific product.

I have seen spiffs used in several scenarios such as when a manufacturer wants to gain market adoption with a new product, when a retailer wants to liquidate some of its inventory, to incent sales people to sale certain combinations of widgets, etc. The goal is always to have an immediate impact on sales force behavior. Of course, spiffs are not without their own pros and cons, but they can fit nicely within a compensation strategy.

Here is what David had to say about spiffs:

Julien, you might want to check the spelling of “spiff.” I spell it with one “f.” It means Special Performance Incentive Fund. Check Wikipedia for a nice discussion on the spelling. [Sorry David - I'm sticking to spiff for now, so far I've seen it spelled this way more often than "spif"].

First of all, I consider spifs, contests and campaigns an integral part of the sales management’s tool kit. Here are the rules for appropriate use of these programs:

  1. Budget of all programs should not exceed the total earnings of the sales force by 3% .
  2. Spifs should be used for “doing something new for the first time.”
  3. They should not be used to spike performance during a period.
  4. They are narcotic in nature: the more you use them the more you need to use them. Moderation of use with healthy hoopla is the best prescription for success.
  5. Avoid the use of “chance” to determine winners and payouts–it ’s unethical to do so: this is an employment relationship, not Las Vegas.

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