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“Incentive Systems Promote Corporate Corruption”: Guest article by Al Gorman

Forrest Christian Managing, Reviews - Articles 3 Comments

Al Gorman has sent me an article that explains in more depth some of the points about incentive systems that he has made on this site. He’s volunteered to have it posted here, so I’ve converted it to PDF for easy, non-threatening viewing enjoyment.

It’s interesting that he and Harald Solaas make such similar points. I think that Solaas says something in “Why Requisite Organization Is So Hard to Understand?” along the lines of “incentive pay is evil” but “stupid” may be more accurate. Peter Block also makes the same point in The Right Use of Power. When the post-talk interviewer asks him about incentive pay, he asks “How do you know that it works? Did no one do anything when there wasn’t an incentive?” It’s a good thought and I think that what Gorman is describing answers some of the questions that Block poses. Block’s ideas are good but he doesn’t quite know where to go. Felt-fair pay seems to provide a good direction.

Go read “Incentive Systems Promote Corporate Corruption

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Comments 3

  1. Post

    “The difference in merit pay between the outstanding and poor performers is so small that there’s no incentive value at all. Not to mention the fact that it’s so unclear how a person got a higher or lower raise that it takes an enormous leap of faith, or stupidity, for an employee to decide that pay and performance are really related.” – Edward Lawlor

    From Donald Brooks, “Merit pay – the hoax (redefining the merit pay system)”, Canadian Manager, 9/22/1992.

    Figured that this was related…

    JMMJ and I have talked about this problem at his job. I’ve certainly gotten the attitude that if you want to reward me, it has to be in very large bonus. Something more like US$100k than US$5k. But maybe I’m just jaded. Or tired to doing the work of three or four other people.

  2. Al certainly makes good points. In another discussion we bantered over this topic. Basically, incentive programs can be developed which are trustworthy, honest and fair. Like any other program, process or procedure, you write it out, publish it publically and follow it to the letter. Additionally, every two years or so, you go back and tweek it for improvements. This is merely proper leadership.

    Al’s excellent point, and it is by far his most salient, is that incentive programs are by nature, short sighted. In the first 24 months I was in charge of my plant, I made the concious decision to not avail myself of the benefits of our generous bonus plan. Most people don’t make that selfless decision and hence problems in plants or operations don’t get fixed. Al’s point that you want folks to look long term is excellent and a very real problem.

    However, as long as there are incentive programs, companies can deny you pay and reduce their costs. They aren’t going away any time soon.

    Merit pay systems are generally gutted by HR professionals who are trying to avoid lawsuits. I agree that they are in general a waste of time and effort. I don’t agree that they couldn’t be set up in such a way that they worked, but as long as corporations can be harrassed by frivolous lawsuits, that won’t happen. So, realistically, I agree, merit pay doesn’t work.

    Finally, I finally read the Solaas article. I found it highly enlightening that he points out on page 10 that “under extreme conditions the margins for deviation [from requisite organization] seem to narrow down.” He is referring to the fact that military organizations in conflict are very requisite. What happens in a high intensity conflict is that all the extraneous detractors from mission fullfilment go out the window. Also, incompetent leaders are forcibly removed as only the competent survive. I think he’s absolutely correct. I can see that, understand that, and believe. I can also say definitively, that you’ll never recreate that environment in any corporation in America. Too many legal restriction for you to be able to winnow your organization of dead wood and move people around to accomodate RO. It is conceivable that you could start a new organization and build it correctly. And it is conceivable that you could get within some standad deviation of requisiteness within an older organization.

    I see Al’s article is copyrighted. May I forward it to a friend? Thanks, – J

  3. Feel free to use and forward the article as you please. Agreed that the probability is incentive schemes will not be disappearing any time soon. Companies may falsely believe that by retaining a portion of one’s total remuneration as a discretionary variable component that they have a fix on their labour costs. Unfortunately if they understood what this is costing in terms of quality, poor decisions and lost productivity they might quickly reconsider.

    In addition the provision is generally very lucrative for the senior executives and officers of the corporation. Dennis Dammerman and Robert Wright of GE each received $5 MM bonus, as did Jeffrey Bewkes and Don Logan of Time Warner with Gerald Levin receiving $9 MM and R.E Turner at $6.9 MM while Michael Eisener hauled in 6.2 MM and Robert Iger $5 MM at Disney. These are all annual incentive payments and I didn’t search too hard to find them. In fact these were three of four companies I ran a quick search on while preparing this response. Who in their right mind would offer these incentives up? And, consistent with the earlier point how have these incentives affected the long term future of these companies? An occasional individual will be as highly principled as “j” and will forego the available provision yet how many of us, perhaps even including people like “j”, are going to watch $5 – 10 MM sail by?

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