How Should We Balance Business Objectives in Manager Bonuses? Let's Discuss

If corporate bonuses and business objectives are linked, it is said to assist the organization in getting the right orientation. Many companies, therefore, have 'function-related' metrics and 'business-related metrics' for managers. The most common figure is a 50% weightage given to business-related metrics (such as net profit, etc.).

Now, this is an open-ended question. What percentage do you think should be attributed to business objectives? Why? Remember, we are talking about managers here.

It depends upon the company outlook. A good performance system aligns the business objectives with individual ones. You have to find lead indicators and lag indicators to simplify it. Business-related objectives are mainly examples of lag indicators, and function-related objectives are lag indicators.

There should not be any hard and fast formula for this. It should be based on how much control the person has over the results of specific indicators. The ideal way is to create a company scorecard (owned by the CEO) and then cascade it down the line.

Regards,
Vinod Bidwaik

I believe you are bound to have the issue of the 'formula' when you have multiple criteria. Don't you agree? Because ultimately, you have to 'translate' everything to one number.

Challenges in Performance Measurement and Reward Systems

There are multiple problems.

Firstly, not everything in performance is necessarily measurable. Even if you devise some formula, it is not perfect and not acceptable to everyone.

One may come up with a well-thought-out formula for performance measurement and rewards linked to it. As a result of the whole exercise, some employees get x amount as a reward, which happens to be, say, 10% of their CTC. The common argument is why you need to have such a long process and why you have to put so much effort and time into arriving at a reward figure of 10%. We would have gotten it anyways by default.

The quantum of the reward will also depend on: What percentage of revenues management wants to share with employees? Which class of employees? And how? What competitors are doing? Am I losing employees to the competition? How much am I ahead or behind my business competitors in terms of revenues, market share, and sharing of revenues with employees? What is the market value of my employees? What is the demand for my employees in the employment market?

Please refer to the recent classic case of the Indian Airlines Pilots Strike. The airline is in the red. It would have gone bankrupt and would have been shut down long back had it been a private company without the support of the government. Still, pilots went on strike demanding a hike in salaries, causing huge losses and embarrassment to the airline, and the airline still had to concede to their demands. Why? Because there are no ready replacements for pilots, and the airline cannot function without them. Here, pilots are not rewarded for their performance but for the unique market position they hold, even though the airline has no profit to show and no revenue to pay their hiked salaries.

Hence, there is no perfect formula and set percentages. Formulas and percentages will change from market to market, industry to industry, management to management, and company to company among different classes of employees.

Do you buy the argument in the 3rd point? It's an interesting one if one can substantiate and validate the claim. I believe ratings are for deciding the quantum in the first place... Don't you agree? Else, one could do away with it. Simplistically, it is based on the principle that not everybody works the same way in a company, and the effect of the work of individual employees could differ from the company perspective.

At the end of the day, there is no perfect one, but there can be a guesstimate for anyone (and a strong logic)... We want to explore that. Or would you like to skip that step for good?

I fully agree with you. There has to be some process and system for:

- Objectively evaluating the performance of employees to identify excellent performers, average performers, and poor performances.
- Some way of rewarding employees based on their performance and to share good profits earned by the company.

The point I was making in my post is that sometimes the results given by a well-defined formula and a long process are the same as that of a very basic or conservative way of increasing salary. Still, I would support having some system or process of suggesting rewards.

As I mentioned in an earlier post, there is no specific formula or percentage, and each company can arrive at some formula considering all relevant factors. Again, you will have to change the formula and percentages every year.

A very commonly followed practice currently is to do a compensation and benefit survey of select organizations in your industry and benchmark your positions and remunerations to remain competitive.