Three Reasons to Scrap Executive Bonuses

In a blunt and thought provoking Wall Street Journal article, Dr. Henry Mintzberg, a professor at the Desautels Faculty of Management at McGill University in Montreal, spells out why we should simply eliminate executive bonuses.  I must admit I read it twice before I stopped twitching. It is a must read for leaders who find themselves thinking hard about what motivates their team.  It will certainly get you thinking!

I’ve always been a big fan of Henry Mintzberg but I flinched a bit when I read the headline – “No More Executive Bonuses! The problem isn’t that they are poorly designed. The problem is that they exist.”  The first half of the article focuses on the faulty assumptions used when tying corporate performance to CEO pay in publicly traded companies.  So the question for those of us in the midmarket is this:

Does an executive bonus plan drive long term business value in midmarket companies?

Let’s put the article to the test.

1. Dr. Mintzberg argues that a company’s “health is significantly represented by what accountants call goodwill, which in its basic sense means a company’s intrinsic value beyond its tangible assets: the quality of its brands, its overall reputation in the marketplace, the depth of its culture, the commitment of its people, and so on.” It is hard enough measuring goodwill in a publicly traded company and almost impossible to do in a privately held company. Everyone has a hard time finding metrics that both show the health of an organization as well as the performance of an individual leader.

Advantage: Mintzberg

2. Commonly accepted business practices say that performance measures, whether short or long term, represent the true strength of the company. Privately held companies normally do not feel the quarter by quarter pressure to produce exemplary financial results and can therefore keep their focus on long term value building objectives. Midmarket execs can almost always “do the right thing” and not be forced to trade off short term gains against long term losses.

Advantage: Bonus Advocates

3. The CEO, with a few other senior executives, is primarily responsible for the company’s performance. We read about this sentiment all the time. Wall Street Journal, Forbes and Business Week are more comfortable touting one person’s vision rather than a shared vision with an associated actionable strategy. Midmarket execs are not the rock stars their counterparts of publicly traded companies are so I find they have strong commitments to their customers, markets, employees and virtually all the stakeholders.

Advantage: Pick-em

So what do leaders in the midmarket do?  Do you eliminate bonuses altogether?  The old saw that people “act as they are measured” is 100% true.  If you measure and tie bonuses to key management indicators that do not build long term business value, you’re in trouble.  But if you start with behaviors you desire such as making raving fans out of your clients or building a workplace culture that attracts and retains the best, you can find ways to measure elements of the behaviors that will lead to the business results you desire.

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