The Inverted Bonus System

Last month I posed the question about linking individual performance bonuses to company performance. This month I will take that idea one step further:

What if all bonuses were paid on company performance and the order of payout was inversely correlated with the degree of influence over company performance - shareholders first and CEO last?

The Inverted Bonus System

I draw on the experience of UMass friend and alum, Balaji Krishnamurthy, the former CEO of Planar Systems of Beaverton, Oregon. Shortly after taking over Planar as CEO in 1999 Balaji crafted an unusual inverted bonus plan. Here is how the plan worked:

Planar needed to exceed tough operating income goals that benefit shareholders before rank-and-file workers receive quarterly or annual bonuses. Middle managers didn't get a dime until those junior employees pocketed their full target. Executives stood in line behind managers and received nothing until middle managers received their full target. Dr. Krishnamurthy received nothing in bonus until shareholders and all employees received 100% of their bonus.

"Pushing the Edge" of Your Thinking

• Is this a fair system?
• How would you react if you were a shareholder in this company?
• If you were a VP in this company?
• What behaviors does this system encourage and discourage?
• Under what conditions might you advocate for this reward system?

I welcome your comments.
Read Balaji's statement on the inverted bonus system success at Planar.

Read the WSJ story on the Planar's inverted bonus system.

Feel free to share this mailing with friends and colleagues.

About Balaji Krishnamurthy

Dr. Balaji Krishnamurthy has a PhD from UMass Amherst in Computer Science and distinguished career in the technology industry. Dr. Krishnamurthy has received global recognition for the innovative leadership concepts that he has put into practice. TIME magazine and CNN recognized Dr. Krishnamurthy as one of 25 Global Business Influentials. His leadership ideas have received recognition by the Wall Street Journal and other national publications.

Balaji's current company, Logistyle, offers corporations and boards training and tools for building leadership.

In Praise of Team Performance

Imagine that your CEO sent out the following memo to all employees in the company:

Dear Fellow Employee,

As you know we operate in a highly competitive marketplace. Our growth aspirations face many challenges. I believe we have assembled a superb set of talent to overcome those challenges. The key to our success will be how we operate as a team.

Today, I am announcing the elimination of all individual performance bonuses. Each employee’s total bonus target will be the same as before but we will be calculated bonus payout based upon a unified set of company performance factors. Simply put, my bonus performance per cent realization will be the same as yours. Starting today, we are one team. Go Team!

Your CEO

How would you react to this memo?
Is this a fair system?
What behaviors does this system encourage and discourage?

Alignment

Is it possible to align behind a decision that you don’t agree with?

Consider this example.

A team has just concluded a meeting about how they were going to achieve a near term goal. There was a headed debate about how to move forward. Several don’t agree with some of the proposals. They believe strongly in their point of view. A decision is made. Each member of the team gets behind the decision even if they previously disagreed with that course of action. How can passionate leaders drop their disagreement and align behind a decision?It happens all the time.

In this case the team is a football team. Every play is a debate, decision and alignment progress that takes place in 45 seconds. It’s third down and four yards to a first down. The on-field team comes together in the huddle. The wide receiver says “throw me the ball across the middle.” The running back says “give me the ball. I’ll run off tackle”. The play is called as an end run. The team breaks huddle. Everyone on the field knows what they have to do to execute. It is expected that each player will “own” the play and execute with excellence. This play was successful. Not every play yields the intended results yet each player must own the decisions of the huddle to have any chance of winning the game.

• Does your team know how to debate openly?
• Does each member typically align around a decision once it is made?
• What if the decision does not yield the intended results?
• What would it take for you to align behind a decision that you did not agree with?
• What conditions need to be in place for team members to execute what’s expected of them once the decision is made?

I welcome your comments.