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When Bonuses Work...

...even for Northern Rock employees.

 There was an interesting debate on Question Time last night about the bonuses that are to be paid to Northern Rock staff.  The views spanned the spectrum, from one delegate who said bonus schemes shouldn’t exist at all – anywhere - to a part-justification of the process.

 I say ‘part-justification’ because the endorsement went only so far as to say they had to be paid because that was what had been agreed at the outset and the agreement should be honoured.  I would have gone further and said that bonuses are a very useful way of managing performance and were probably right in this instance.  Where the bonus process normally breaks down is in two areas: identifying and rewarding what is truly value-added and thinking through the consequences of the targets set.

 Taking the first issue, one of the delegates said that the bonuses should not be paid because those people were only doing their job.  This may be true, but I remember seeing something, at the time the process started, that set out the targets they had to achieve in order to trigger the bonuses.  I understand the NR people have beaten those targets and therefore they deserve their reward.  The only question is whether the targets were stringent enough in the first instance.  Presumably, the client (in this case, the Government) had a view on the rate of repayment of the state finance that was ‘within the normal course of business’ and then added on a stretch to encourage people to work even harder.  Personally, so long as genuine added value in this way is identified, I see no reason why bonuses shouldn’t be offered, then paid if those stretch targets are achieved.  This is how you improve business growth rates and this should tool never be lost from management’s armoury.  In this case, the Government has failed only in that it didn’t set this out to commentators in the first instance, or at least not clearly enough.  Hopefully, most people can identify with the paying of bonuses for over-performing…

 It is the second issue that is seriously at fault.  It is probably the case that the Government did not think through the consequences of incentivising the reduction of the balance sheet thoroughly enough.  They presumably didn’t think that, if you dangle a large carrot in front of debt collectors, they will go for it and that the inevitable consequence of this is twofold: 1) that the rate of repossessions would climb like a Saturn V rocket and 2) that, when they achieve the bonus, commentators would paint it as rewarding people for making others homeless, with all the attendant outrage that would result.  Had they thought things through properly, they would have put an additional clause on the bonus arrangement to only make it payable in the event that the repossessions rate was no more than, or less than, the industry average.  That way, they could have avoided this grief and made the whole process far more humane.

 This inability, or unwillingness, of management to think through their bonus schemes properly is what got us into this mess in the first instance (e.g. incentivising only on new mortgage business regardless of its quality).  Let’s hope there aren’t too many other examples of bonuses being paid to those who get us out of the mess, set out with a similar lack of clarity of thought.


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