Tuesday, December 14, 2010


It’s that time of the year again: bells, baubles and bonus bubbles. I’ve called the latter bubbles because they are not unlike those much feared fragile things that happen in stock and other investment markets: inflate to catch the attention of all and sundry and then … pop!.

For many, bonuses are a routine “13th cheque” factored into “entitlements”. I employed a day worker for 2 days a few December’s ago to help clear some refuse. After paying him the agreed rate plus a bit extra, he became extremely agitated at not being paid double for a “krismis” bonus.

Then there are those bonuses based on “merit”, leaving some angry, most petulantly envious, and a handful a bit embarrassed by their good fortune. Very few, if any, see their bonuses as the outcome of a deliberate effort by themselves to improve performance during the year: it’s the luck of the draw based on a tedious annual assessment where things are said that should have been dealt with routinely and regularly during the year. Then there are those that follow good profit performances as a gesture of gratitude and sometimes on top of the “entitled” 13th cheque or incentives.

Executive bonuses are in a class of their own and I dealt with them last week.

In writing the “Planet of the Apes” article a few weeks back and in a general review of the theme on incentives and fortune sharing, I recalled some strange quirks in the field of bonuses. One that caught my eye recently came from Australia.

clip_image002The owner of the Yabulu Nickel refinery, Clive Palmer was so enamoured with the company’s performance this year that he has given the 800+ staff some incredible goodies: the best performing 55 got a Mercedes Benz each, 700 a five-star Fiji holiday for two; and the worst performing 55 received week-ends at a 5 star luxury hotel. Incentives have worked well for Palmer, who was able to turn around the previously BHP Billiton owned refinery from a loss into success on a staff incentive drive.

Clearly there’s more to it though. Palmer has been able to get everyone enthused and involved with the saving and sustainability of the venture. The size of the rewards reflects a large measure of “fortune” sharing with the variable part of the total package higher than the norm. Its sustainability, of course, is going to depend on staff expectations and the extent to which these can be tempered by the involvement that made the payouts possible in the first place.

I saw something similar, although on a much smaller scale, while consulting to a gold mine on the West Rand some years ago. I arrived one morning to find the General Manager very animated. He had received an envelope with about R40 in cash. So did everyone else at the mine. The camaraderie that day was tangible and transcended all hierarchies. This mine had a simple bonus calculated quarterly on gross revenue, which was close to a value-added measurement. The results were shown on a huge “thermometer” at the entrance gates, and when it “spilled over” everyone knew a payout was due. This seldom exceeded R100. It was a unique “common effect” trigger which became part of my thinking on fortune sharing, and at the time I thought it was an ideal involvement tool.

A few months later, I arrived at the shaft to find the place in a mess. Rubbish was strewn everywhere. I was told that news had leaked that management were mooting staff cuts to reduce costs and that the surface cleaners were the first in the firing line. So in solidarity with their cleaning comrades the surface was trashed to preserve jobs. It makes one wonder whether municipal workers have the same thing in mind during strikes. It reminds me of that Bastiat satirical sketch in which the 19th century French economist suggested that all workers should tie their right hands behind their backs because it would make work more difficult. This would create more work and in turn more wealth.

What the mine incident taught me was that involvement cannot be achieved by incentives alone, even if they are structured to affect everyone equally. The key to involvement is more about sharing understandable information than it is about sharing wealth.

At another mine some months earlier, incentives for underground workers were structured to promote production. The base was meters mined very much like my father’s high speed developing days. Month after month teams were called into “lo-offees” to receive their production bonuses. Until out of the blue, they were all called in and retrenched. Both the gold price and the ore grade had dropped and the bonuses being paid were simply unaffordable, leading to the closure of the shaft.

Fruit farmers here have a similar problem. They pay pickers according to volume, leading to an indiscriminate handling of the fruit that causes bruising which surfaces days later. So they have to employ overseers that cost them as much as the pickers themselves. A team of pickers often contains a group that, to avoid being embarrassed, put peer pressure on the star performers to curtail their efforts. Others again, having earned enough to fund a few days of “moss” consumption, simply slack to zero effort or disappear to re-surface at another farm.

I did some work at one of those curses of modern business – a call centre. The incumbents were paid according to number of calls handled with little regard to the content of the call. Needless to say it had a devastating impact on client service, and the system was changed. One financial service company I know of stopped paying their agents commissions on products but rather bonuses on clients recruited and maintained. There was also an interesting twist on executive bonuses. It was pooled and the group had to decide on each share.

The need for a thorough understanding of the workforce before structuring reward systems is a universal rule. Our class at the Oxford Centre for Management Studies was exposed to a case study in which an electronics component manufacturer in a small Scottish town paid the assemblers a bonus over a certain quota of components produced. It lifted production for a while but quickly returned to the standard. Apart from the same negative peer pressure, they also discovered that the employees, mostly young girls from the village, lived with their parents and had to hand over their full pay without benefitting from the bonus.

Then there’s Keith, a Johannesburg accountant who fled the Gauteng rate race to move to the Overberg. Pursuing his first love of gardening, he bought an ailing garden service and within months was not only able to overcome local prejudice against “inkommers”, but had the books substantially in the black. He provides excellent service through personal supervision and by ensuring that each of his team (of which Jan Rasta was one) shares his passion for the job. After each job, Keith runs through the financials with his workers and where every cent goes. He then includes a share of the weekly profits in their pay.

It is dangerous to relate all performance to a “work ethic”. I would challenge any Korean worker to perform better under the conditions that our mineworkers have to -- conditions of which I have first hand experience.

A willingness to give the best of oneself is nurtured by much more than pay or incentives. It has to include a measure of virtuosity, a common contributory purpose and a sense of common fate, involvement, information sharing and leadership styles based on care and individual development.

Our largely Anglo Saxon inspired bonus systems have arguably become dysfunctional and counter-productive. “You get what you pay for”, they say. Often it is not what you expect.

Wishing my readers a festive season filled with contentment. May your choices in the New Year be the correct ones.

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