Great Question

Frank Roche of the knowHR blog asks a very insightful question on this post…

Why is it that the same managers who use “people don’t work for money” to justify underpaying workers are convinced that their own bonus and long-term incentive plans are great and highly motivating?

I have an opinion as to why.   First of all I don’t think they use the excuse to justify not paying bonuses, it’s just that it is too expensive as you move to a level where you have a lot of employees.

Money becomes a motivator when the amount is motivational.  Too little and people think of it as a hollow effort and an insult.  Too much and it’s obscene.  (See this post – which I also found through knowHR blog – if you want to see pay disparity obscenity in action.)

Managers can get bonuses in the form of compensation because the math works.  Let me walk through an example.

Assumptions:

• Manager makes $100,000
• Each employee under his/her management control makes $75,000
• Manager has ten (10) direct reports

If we wanted to give each person on the team a monetary incentive it would have to be approximately 3-5% of base annual salary (rule of thumb) to get any attention and be seen as worthwhile.  And remember, the tax man cometh on these bonuses – so no one actually realizes the full amount of the bonus. 

Let’s just use 4% for the example.  In order to get the employees attention we would have to give each one $3,000 in bonus (of which they would realize about $2,100 after tax.)

Times 10 people that is $30,000 cost to the company.

Now – 4% of the manager’s income would be $4,000 – enough to get their attention and $26,000 cheaper for the company.  This post I did a while back shows the concept with a graphic. 

Therefore, it’s not that management consciously decides that money is better for managers than for the rank and file it is simple math – it’s cheaper for the company – and possibly just as effective.

Now the real question is – going back to the ridiculous multipliers we see relative to CEO vs. rank and file – at what level does it makes sense to stop doing this.  In effect, huge CEO bonuses are communicating that the CEO actually has impact on the lowest level in the pyramid.

One thing that this makes me think about is that as the hierarchical organizational structure of  past starts to crumble – will more targeted incentives to the "doers" become more prevalent since the amount of influence top management has on work flow and output begins to wane?