In the 1990s I worked for a one organization where bonuses were paid annually tied to annual financial indicators and whether or not I was a strong performer. The latter part of the evaluation was subjective based on how well I did as an individual contributor, manager, or team player. Being an annual bonus the evaluation was averaged out over the year and didn’t provide a sense of urgency for immediate change going into the next evaluation period.
In the early 2000s I found myself with a new employer. The bonus system was based on quarterly management by objectives (MBOs). The bonuses were measured and paid quarterly. They comprised individual task completion, company revenue and profit objectives, adoption of new business directions, and team objectives. They were black and white, recorded, exposed for everyone to see, and much less subjective.
The most significant difference between the two organizations had to do with decision-making. My first employer made decisions based on consensus. It took months and sometimes quarters to make decisions, but once the decisions were made everyone aligned and execution was fast. However, with my second employer, decisions were made very quickly and not necessarily with consensus. People and teams were focused on action and results. Not everyone aligned, but grumbling was quickly silenced as we were all tied to the MBO payment.
Another marked difference was the ability to change an organization’s behaviour and trajectory. When my second employer made a decision to change directions they made the new direction a critical component of the quarterly bonus payment. If you didn’t align you were not paid. This drove the organization to respond quickly and with agility. My first employer meanwhile festered in decision dilemmas while teams and individuals took months to align and change direction.
Is one incentive management system better than the other? From a pure business results perspective both organizations continued growing at about the same pace. In fact, they were neck to neck for years. But from a personal perspective, I much preferred the organization that responded quickly to change. With the right payment structure to incentivize individuals change was fast and nimble. Right or wrong, the quarterly MBO system encouraged the teams to just get on with the change. The individuals just did it and in the process built a significant amount of maturity in their business processes so that they could better respond with agility to changing management and market conditions.
I see several organizations struggling to change their staff’s behaviours with urgency, however, are stuck with annual bonus systems tied to revenue or profit only. If you tweak the incentive program to motivate changes in leading indicators you’ll be amazed at how quickly an organization can move.