GovernmentExecutive.com

This post, a guest entry by Howard Risher, a consultant and author on performance-based pay who's been of frequent help to me in understanding compensation issues, addresses some of the issues I raised on Tuesday.

The outrage over the AIG bonuses would seem to have important implications for the federal pay program. Every critic, including President Obama it seems, is in favor of using financial rewards linked to performance. Their criticism has focused on two issues: (1) the idea that any organization would award bonuses in a year when the organization’s performance was unacceptable and (2) the lack of evidence that the individuals performed well.

The critics and voters across the country have also reacted to the amounts. The payouts were staggeringly large. But the more shocking issue is the apparent recognition by the critics that the awards were not out of line with common Wall Street practices. It’s a different world.

The 1987 Michael Douglas movie, Wall Street, is no doubt the best recent depiction of the culture that led to this fiasco. The sentiments expressed by critics are accurate – greed, arrogance, entitlement, short-term focus, etc. As someone who managed a compensation consulting practice in Manhattan, I can confirm it’s all true. My six years in that role gave me a good understanding of incentives but also convinced me to get out of that world.

The Wall Street practices have little relevance to government – or is that true? The debate suggests broad acceptance for financial incentives. It will be difficult for any elected official who has spoken on the record to express a blanket opposition to financial rewards linked to performance.

My experience, along with extensive research by a number of academics, has convinced me that well planned cash incentives can be a powerful management tool. The key is the payouts need to be linked to desired results. As a rule, the awards in business are solidly linked to performance metrics. There is very little subjectivity. Bonus practices evolved out of profit sharing schemes. Then there is a formula that governs how the dollars are divided.

That history also relates to another issue. Incentives in industry are linked to company or team performance. That’s always true for executive incentives – Wall Street‘s focus on individuals is an exception. Yes, corporate CEOs have been known to control payouts to their benefit but in the textbooks executive awards are linked solidly to company success. That is the profit sharing heritage. Companies would never consider the SES scheme where awards are tied to individual performance.

Another important distinction is that corporate incentives commonly include middle managers and at least the higher level professionals as incentive participants. Their planned payouts are to be sure smaller but they are part of the team and their awards depend in part on company performance. Companies would not adopt a plan with the chasm between the SES and middle managers.

The impact of incentives has been proven at all levels. Over the last decade or more one of the most important trends in compensation has been the introduction of group and team incentives, sometimes referred to as ‘gain sharing’ or the phrase I prefer ‘goal sharing’. The idea is simple, when a group of employees achieves one or more goals, they all benefit. Companies do not spend money unless they expect it to payoff.

A thread that runs through corporate practice at all levels is the linkage to performance goals or metrics. The subjectivity that runs through government practice would be rejected in the business world (except for nominal ‘spot’ bonus awards). With the increased focus on accountability and results, and the Wall Street spotlight on incentives, federal agencies perhaps should take this occasion to confirm awards are justified.