Just read Dan Ariely’s second book (The Upside of Irrationality). He really hammers the corporate pay bonus issue. Based on research with mice, and with homeless people in India (the only connection is that in both cases he could pay meaningful extravagant bonuses that fit his research budget) he found that after a modest bonus amount, the stress associated with getting the bonus negatively affected performance.
In other words, such a high payout had psychological affects that didn’t help work performance – in fact, hindered it.
The fact that (especially in banking) there doesn’t seem to be a correlation between bonus payouts and company performance helps his case, and it seems that in his speeches to bankers their only defense is either “we’re different than normal humans”, or “if I don’t pay them, they’ll jump to my competitor”…
It is an issue that needs to be addressed somehow, but not sure how…
This bonus issue has direct relevance to our client base. In an investment banking culture, even amongst IT staff, bonuses are a decision-making black hole. Much of our great advice centres on ‘what is the best outcome for the organisation?’ Top of mind for our audience is ‘What is going to be best for my immediate manager’s perspective?’
In large, distributed, and loosely federated organisations (as all banks are), it really is too much to hope that goals set for middle management are aligned with organisation goals and strategy?
What is there for us to do? Treat the symptoms. Acknowledging the problem in our research explicitly is an important step. Breaking down our recommendations more granularly, and into specific scenarios would.
What can’t we do? Global governments have missed their chance to influence banking bonus culture by regulation. The political will to do something meaningful has decayed away after the financial crisis that started in 2007/8.
Maybe next time.
Hmmm… Richard, you have taken it into a different orbit; Ariely only commented on the impact of the size of the bonus, and its counterintuitive effects at larger amounts; you are talking about an organizations inability to tie bonuses, at any organizational level, to corporate goals.
I have never worked in investment banking (Deo Gratis). And I don’t want to sound like I am an apologist for poor management. But I would say that my experience (insurance, pension fund management) is not quite the same. So I would avoid a broad brush or black/white view on this – some companies do get it right (or at least as close to right as you can in such a human-centered gray area of decision-making).
So in that spirit I am sure you meant “is it really too much to hope that goals set for middle management are aligned with organization goals and strategy for every organization?”
In that case my answer would be YES – there will always be bad management. Is this an important enough issue that “getting it right” should be more than the current percentage (whatever that is – and we would need research on it)? That I don’t know. Nor would I know how to/and whether it’s worth regulatory intervention to ensure business goal/bonus alignment.
And why stop at MIDDLE MANAGEMENT??? This is the type of goal setting that needs to permeate the organization. I think in many cases the real issue is that managers and supervisors are not trained to communicate an explicit relationship between bonus and corporate goals; or have ulterior motives (personal allegiance and gratitude) to “bend the explanation a bit”. Or are just downright unethical, and don’t get caught giving bonuses to friends rather than on explicit metrics (I think that case is less likely, but am sure it happens).
Is this important talk about? Absolutely.
Our research hammers on this: tie IT goals to business goals, always, and explicitly. It’s just a short leap to apply the same mantra to bonuses.
I agree we have missed an opportunity this time around on regulation, but I wonder whether it’s worth regulatory intervention to ensure business goal/bonus alignment..
Should we buy gold in prep for next time?
On Goals & Bonuses: The issue specific to banking is that when bonuses are proportionately so large (e.g., even in IT, I earned a bonus worth 40% of my salary one year) maximizing this as a short-term goal eclipses any longer-term goals. If everybody from developer to CIO and CEO has ‘how can I maximize my bonus’ front of mind, you’d better be darn sure those bonus goals are aligned with the organization’s interests. I would hammer even further: tie bonuses to goals, always and explicitly. Make the bonus award transparent to eliminate those nefarious issues you mention.
Regulatory Intervention: Regulations will not affect 95% of people in IT, because, quite frankly: we aren’t paid enough to be concerned with. But regulations could have some sort of distorting impact on the bonus culture that trickles down to all departments. Hard to see that kind of tinkering having the desired effect. We may both be wrong about regulators missing the boat. In Europe sometimes things take their sweet time. See this in today’s FT.
And finally, gold? Another bubble in the making, of course. So much currently liquid assets (surveyed in FT today by Alan Greenspan, no less) chasing any kind of return will inflate that sucker.
I think we are in violent agreement on the issue of goals and bonuses.
As for regulatory intervention, the FT link disproves your point – the long arm of regulation could very well impact all bonuses in the guise of tax law – I hadn’t thought of that. Bonuses could be taxed at a higher rate than earned income. We in the US were here before – about 20 years ago US tax law changed so that “perqs” were taxable income. What’s a perq (perquisite)? A parking space, a discounted lunch, even a PC that is used for personal use (technically). Rather than enter into onerous accounting of perqs (regardless of level in the organization or salary ) employers started charging for things that had become free under company culture… But your point is well taken that the bonus issue is much more significant in scope and weight at the senior levels, as it is for financial traders.
Alan Greenspan? I thought he retired to write a sequel to “Atlas Shrugged”…