Traffic signal at Tamil Nadu. (c) 2011 Thamizhpparithi Maari (CC BY SA 3.0)

Incentive-Based Compensation Destroys Productivity

Forrest ChristianManaging, Organizations Leave a Comment

Wall Street Online (through Yahoo!) is reporting that the stock market has had a major affect on the main compensation method in many industries: incentives. Unless the market increases substantially, with the DJI running back up towards 12 000 or 13 000, the options that were granted for the last five years are not worth what they were optioned at, according to the article.

Sure, major CEOs are being hit with some shorts that went bad on them, having to liquidate a lot of their multimillion-dollar compensation packages to pay off calls.

Lower-level employees are also being hit. The software industry pays a great deal in various incentives rather than straight pay, which is actually kind of lousy in many companies. Their incentives over the last five years have become boat anchors, often worth less than they were “purchased” at.

Back when I worked with a boutique consulting firm, one of my coworkers had just come from the end of an ex-hot web consulting firm. He said that stock options had made him a multimillionaire last year.

I asked how that had played out, having all those stock certificates in a company that had been bought for about 0.5% of its earlier market valuation.

He thought for a second. “What’s the price of waste paper these days?”

These types of incentives are counter-productive for most organizations. (But not all.) Al Gorman has written an article about incentive pay (see the sidebar for the link) and Mark Van Clieaf has talked at length about this in business journals, the press and even CNBC. I’ll let Al say why they are often a bad idea.

If you know the work levels concepts, this is the big opportunity to put them before the public. The current financial crisis has been stabilized but Buffet’s long-distance runner still has a long recovery and has to stop eating sticks of butter on the way to work. Start where you are and get the word out. More than likely, you’ll make some money doing so. It’s a great example of the crisis presenting opportunity.

Traffic signal at Tamil Nadu. © 2011 Thamizhpparithi Maari (CC BY-SA 3.0). Via Wikimedia Commons.

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