It’s Time To Challenge Bonuses
I must admit that I do not understand why those in the financial services industry need such large bonuses. I am not alone in struggling to grasp what they do that offers such tremendous social benefit (indeed, a report in today’s Financial Times claims that “Top Bankers Destory Value” for society). No one has explained what unique talents or education these financial experts bring to their work. I am unclear what loss there would be if they were no longer bonused in this way and felt ‘obliged’ to move to alternative careers. Indeed, if they are so talented, then perhaps those alternatives would be of greater social benefit. And if they are not so talented, perhaps they would simply remain in their current jobs anyway.
I am steadily becoming more convinced that bonus schemes cause undesirable distortions in many areas of our economy – including the world of contracts. It will come as little suprise that, in IACCM’s survey on ethics earlier this year, one of the main concerns expressed by members was the extent to which sales staff are incented to exaggerate commitments. Many contracts and purchasing professionals wrestle with the mismatch between sales’ promises and contractual limitations. This is often the cause of mistrust and of the battle over risk allocation that distorts many negotiations.
As a specific example, last week I was talking with a senior governemt official about the public procurement requirement to avoid direct discussion with individual suppliers. We discussed the fact that open forums prevent suppliers sharing new ideas and describing possibilities for differentiated solutions – a factor that some of my senior contacts suggest is significant in the frequency of project failures. The official agreed, but explained that the policy cannot be breached due to the propensity of suppliers to take legal action when they lose. And he suggests a major factor is the distortion caused by short-term bonus schemes - the severity of personal loss that results from failure to win a major bid.
In a simpler world of product sales, where force majeure was an accepted principle, bonuses perhaps made sense. But today, in a complex global environment, they cause distortions that generate unacceptable risk. For all of us in the world of contracts, perhaps the time has come when we should consider becoming advocates for a new approach to reward systems – an approach that would be more consistent with the ethical standards of contracting and the delivery of value.
A good start would be for us to start sharing information about some of the distortions we observe that result from the behaviors induced by bonus and other incentive schemes. Any initiative for change must start by illustrating the damage that is done by the current approach. Do you have examples?