Those incentives schemes for CEOs, which can deliver double pay and more, don’t work that well for middle management.
The goals are sometimes set so high that managers hide results which don’t hit targets because they fear being seen as failures.
The current debate in Australia over the size of CEO bonuses, as well as the trend toward so-called soft targets, rather than hard financial metrics, hasn’t covered the anxiety in lower management levels about how to meet targets and keep senior executives happy.
While many shareholders were upset enough the vote against senior executive pay changes at the Commonwealth Bank AGM, there’s little discussion on how incentives schemes impact middle management.
Work done at the University of Sydney Business School shows that the more ambitious corporate incentive schemes and performance goals can cause anxious employees to lie about results in a way that has a negative impact on productivity.
“Organisations are emotional arenas, not just economic entities,” says professor of accounting Wai Fong Chua.
She points to the Finnish multinational Nokia, which suffered financially because of the fear that it generated among middle and senior managers.
“Shared fear was so strong amongst Nokia’s middle managers that they withheld important information about the viability of its technology from senior managers,” says professor Chua.
“The company suffered significant losses as a result and was forced to exit the smartphone market.”
Chua’s research relating to the Australian subsidiary of a global computer company shows there’s a need to understand the processes, information systems and performance/financial goals that “have an emotional impact” and economic consequences.
“Take for example, a billion dollar revenue target that is to be achieved within 18 months, this tends to produce an effective outcome,” she says. “It could be anxiety, it could be fear, it could be excitement, it could be all of these things and that, in turn, affects the way people work in an organisation.
“I believe there is considerable fear and anxiety in today’s corporations, especially those experiencing financial challenges. When corporate distress is not well handled it can have quite adverse consequences.”
Goals that make staff stretch their abilities can motivate staff. But they can also prompt fraud when tied to incentive schemes that operate in unsupportive corporate cultures, she says
An example is the Wells Fargo bank in the US where 5000 employees are thought to have created fictitious customers in order to meet or exceed their performance goals.
Chua is also looking at start-ups and the relationship between entrepreneurs and investors.
“When passionate entrepreneurs, who are really keen on developing their product, turn to venture capitalists, the focus of their project may change in an unwelcome manner,” she says.
“Investors are generally interested in earning a quick rate of return and their shorter-term focus may differ significantly from the passion of entrepreneurs.”
Anthony Mitchell, co-founder and chairman of strategic leadership firm, Bendelta, says the biggest problem with incentives is that they work.
“It’s important to understand that incentives drive behaviour and this will always include both intended and unintended consequences,” he says.
“Companies should aim to predict the unintended consequences and decide whether or not these outweigh the positives — and how any negatives can be mitigated.”