Each February, boards and management spend thousands of hours on their annual bonus programs. Energy companies in particular can struggle to evaluate annual performance in what is inherently a long-term business. Arguing over an incremental handful of bonus points can often take a toll on an otherwise productive relationship between a compensation committee and company leadership, or position a company for difficult messages to the workforce.
- “There isn’t enough ‘stretch’ in these goals.”
- “The results were influenced by factors outside management’s control.”
- “We can’t rely on a formula to judge our performance.”
- “We need to be competitive with what everyone else is paying.”
These and other time-consuming points of contention might lead one to wonder whether it’s all worth the fuss. Does having a bonus program improve business results? Imagining what it might be like without an annual bonus program might help focus the conversation on what a bonus should be doing in the first place.
What if a company got rid of its bonus program and shifted all its bonus opportunity into salary and/or long-term stock? – a combination of shares, options or stock performance-based awards. What might happen? Maybe:
- Less focus on short-term results; more focus on long-term objectives?
- Fewer debates on the difficulty of business goals?
- Less distraction from comparisons to bonuses at other companies?
- Compensation more directly aligned to long-term value creation?
- Shorter, more productive board meetings?…
The reason these sound appealing may be that so many bonus programs have drifted away from their primary role: clarifying the company’s most important near-term business objectives, motivating the organization to achieve those goals, and communicating how well the company performed against them.
A well-managed program can generate a healthy return on the bonus investment. It requires careful definition and focus on business priorities, common performance expectations between a board and management, and a unified commitment to pay for results – whether good or bad. It still takes a lot of hours, and forces difficult conversations, but it can definitely contribute to performance.
Now, back to setting goals…