Additional vacation time, telecommuting options, and/or flex time scheduling mean little to a banking professional who must work 80, 100, or even more hours per week, 52 weeks per year… less they lose their position to a harder worker. True, stock and stock options can prove a comparable incentive to cash, but only when times are favorable and the stock is increasing. They lose their appeal when times are bad and THAT, unfortunately, is when employers need to retain and motivate their high performers most.

 

No, the bonus is just too effective a tool to let die, simply because the media and politicians wish to jump on the let-government-determine-your-pay bandwagon and steer the population away from government’s major role in creating the fiasco. 

 

So, what to do? Well, the problem is not with the tool, but with the misalignment of how the bonus may be structured in opposition to what is in the company’s better interests. Especially in a culture, such as our own, that tends to focus more on the short-term rewards, it is management’s responsibility to come up with appropriate bonus structures, checks, and balances to make certain that performance continues, but only in support of the company’s long-term objectives and healthy growth. This may sound simple, but in a culture where companies fund their growth through the sale of stock, and stock price is determined by the short-term reward ambitions of our culture’s stockholders, it can be difficult for management to stay mindful of the long-term.

 

For example, a bonus tied strictly to the profits of the company would be strongly in line with what reflects well in the stock market. It also would appropriately inspire management to cut costs and increase sales. However, to increase short-term profits, the company may forgo investment in newer technology and research and development that would help ensure their survival in the long-term. Thus, the ambitious, short-term, mindset of our culture at large can be seen working against the long-term better interests of our society as a whole. 

 

We see this in all facets of our culture, including politics… From the Russian’s plummeting oil revenues resulting from their failed management, planning, and need to invest in their oil industry’s development… to ALL our own government’s past, present, and planned social programs… which offer benefits in the short-term, but at costs that are unsustainable into perpetuity.

 

So, as you see… it is not the bonus in and of itself that is at fault, but its misalignment with what is in the company’s, shareholders’, and therefore society’s better interest. In a society whose own ambitions run contrary to its own better interest, the challenge of re-designing compensation structures that both motivate the individual, yet perpetuate and optimize the company for the better in the long run, may well prove monumental. Let us hope that 2010 proves to be the year that we see management evolve to the meet the task. 

 

Neil Palmquist

1/5/10