Paying for non-performance?

In a commentary dated 15 December 2007 on “money not enough?” the issues of pay for performance were explored. As discussed, compensation of chief executives and senior management of private enterprises have been under scrutiny by stakeholders. Stakeholders are utterly disgusted at the manner senior managers reward themselves regardless of company performance.

Although the westernised idea of paying for performance has been embedded as the reward strategy in many organizations, the question of paying for whose performance is pertinent. Are we paying company directors, chief executives and senior managers of organizations for their performance such that we may ultimately be “rewarded”? Or, are senior managers paying themselves handsomely for their own “performance”, even to the extent of behaving fraudulently to satisfy their greed addiction.

One need to go no further than to examine the classic case of Enron to understand why pay for (whose?) performance led to the collapse of the organisation. More recently, the collapse of Opes Prime in Australia wiped out millions of dollars of pension funds; First Capital suffered similar fate, and most recently, Victorian stock broking firm in Geelong, Australia has allegedly been behaving badly.

As the economy is flushed with more money and ready credit, greed had consumed some of us, allowing us to be extremely creative in feeding our greed addiction. As an example, the work performance of a loan officer is measured on the amount of credit that is booked for a given period. To secure higher book value, a bank credit officer may resort to unconventional means of earning performance bonus by offering higher credit to its customers, often ignoring their ability to service loans. Hence, many of us have continually been seduced by financial institutions offering pre-approved increases on credit cards limit, or re-financing homes with subsequent mortgages without much effort or difficulty.

For many years, organizations embrace pay for performance as the panacea for driving desired behaviours towards cash and more cash, often ignoring behavioural integrity, ethics or legal considerations. Edward Lawler III, an authority in compensation management once argued against the effectiveness of pay for performance in “why is pay no longer an incentive to better job performance".

Another commentator, Michael de Beer suggested that careful efforts to design an incentive system to make pay contingent on performance may be misguided, and raised questions on the worldwide trend towards the use of more executive incentives. However, many organisational practitioners are still paying extraordinary attention to pay for performance.

Perhaps, it is the idea of pay for performance, but whose performance? Are practitioners familiar with the notion of pay for non-performance?

The notion of performance based pay is rather complex. There are research conducted on pay and performance and on the causation between risks and rewards; the higher the risk, the greater the rewards.

For an economist, pay for performance is grounded on the theory of incentives known as the agency theory. Agency theory, also known as the principal-agent model presupposes the association between time and effort. The employee may influence the amount of work accomplished, by exerting himself, but he cannot control output entirely, because his work performance may not entirely under his control.

Under the agency model, the employee is assumed to be averse to both effort and risk. If an employee is effort averse, then incentives must be designed to get the employee to exert himself. As the employee is also risk averse, the question of tradeoffs between an employee and the employer sharing the risk is pertinent. Risk is in the balance.

As work performance may be beyond the control of the employee doing the work, pay for performance may perhaps be labeled appropriately as pay for effort. Hence, we find ourselves in a flurry of activities, as we are measured on the amount of noise we generate, and not on work related performance.

From a principle-agent perspective, the moral hazard of pay for performance is pertinent. Moral hazard is defined as the ‘‘actions or in-actions carried out by the agent that are unobservable by the principal’’ When the actions of the agent are unknown and cannot be evaluated by the principal, the principal’s ability to enforce the agency contract is hampered. Senior managers control organizational resources and know most about the organization’s activities; this allows them to act opportunistically to the detriment of shareholders.

Because of their superior information and shareholders’ lack of full observation, managers can take actions that will maximize their rewards; but their actions may harm organizational performance in the long run and result in losses to the principals.

In the words of Gordon Gekko, “greed is good, greed is right, greed works, greed clarifies, cuts through and captures the essence of evolutional spirit”. Based from the collapses of organizations involving billions of dollars, is greed really good especially if pensions are wiped out almost completely overnight. Fortunately, the Central Provident Fund of Singapore manages pension of Singaporeans. At least, our superannuation are bolted under lock and key. Otherwise, we may suffer the same fate as the Australians that invested with the likes of Opes Prime et al. Trust is definitely in the balance.

Perhaps, pay for performance may actually be misguided as it will fuel more corporate collapse.

Should we continue to pay for non-performance?

Is Grow 2.0 the Growth Bonus?

Based on the response from the Singapore Teachers Union on the Ministry of Education's (MOE) announcement of its new renumeration scheme, Grow 2.0 may have the effect of attracting talented people to the education profession and positioning teachers and educators more than "a step child" to the other professions.


http://www.todayonline.com, 29 December 2007, More Apples For Teachers

From a reward management perspective, money is never enough. Simply throwing more cash at a problem may motivate teachers to behave like mercenaries. It may also have the undesired outcome of attracting more people into the profession for the wrong reasons, as semi-retired military officers and the unemployed may have once dream of becoming teachers in our schools.

The internet poll conducted by Channel News Asia (accessed on 31 December 2007, 0535 hr Singapore time) re-enforces the notion of "money for nothing" syndrome.

http://www.channelnewsasia.com/polls/index.php?action=vote&id=74&ranid=7757&voteNr=1

Perhaps, Grow 2.0 may address the "money not enough" mentality fueled by debates on ministerial salaries and pay hikes of public servants. The most significant change in Grow 2.0, in my opinion, is that public servants at the Singapore Ministry of Education may no longer be perceived as "money-grabbers" conducting the business of education.

Competitive salaries, as the Singapore Minister of Education commented, are "a necessary condition, even if they are not sufficient to ensuring a top-class teaching service.” He adds that “there is no trade-off between ensuring that we pay teachers competitively and sustaining the commitment and passion for teaching”.

More importantly, the Growth, Career Development, and Well-Being components of the MOE's reward program may be relevant in attracting and retaining people who have the passion to teach, to share knowledge, and to do something useful with their lives. After all, it has always been the non-tangible rewards that attracted the "people sculptors' into the teaching profession and education in the first place.

In addition, Growth 2.0 may be a breath of fresh air in an otherwise "Gordon Gekko" playground. Resource allocation, continuous learning, career mobility, balance in work life for teachers and their spouses regardless of gender, work performance differentiation, spot bonuses, and the refinements contained in the connect (gratuity?) program could spark an "education revolution" within the teaching profession. Whether it stays a revolution in the classroom remains to be seen as the devil is always in the details.

On a positive note, Grow 2.0 may not be contingent on the exceptionable growth (?) of the Singapore economy. Inspiring young people to be entrepreneurs through education is very different from motivating "bottom-line" results-oriented behaviours regardless of ethics, morality, and its undesired consequences.

An English teacher from a secondary school sums up the MOE reward initiative aptly, “Performance-based pay is a double edged sword because it benefits those who shine the most.” The teacher who declined to be named adds “But there are teachers who are more low-profile, yet doing very good work that might go unnoticed.” But then, if you are starving, it is better to be in the kitchen.

Regardless, the anonymous English teacher has a point. We want our teachers to mould our kids and young adults into thinkers, and reflective practitioners. In the realm of "Gordon Gekko", people may have substantial form and dubious substance. These are the extrovert "money-grabbers", and the highly successful players in the game. As we frame our performance indicators for teachers and educators, we should avoid the folly of "rewarding A while hoping for B".

Incidentally, GROW is an acronym for the MOE pay package for "the professional and personal Growth of education officers, through better Recognition, Opportunities, and seeing to their Well-being". What a mouthful !!! and how creative can our public servants at MOE get?

Version 1.0 was announced on 4 September 2006, and version 2.0 on Friday. Perhaps, our technocrats are migrating from Web 1.0 to Web 2.0 metaphorically. Can we stop dehumanizing people by digitalizing them with alphanumeric labels? Otherwise, we may get to GROW version 3.0, release 8A in quick time.

Tomorrow will be a brand new year. If there is a new year message, it would be a "keep it simple, stupid" (KISS) message. The success of a reward program lies in its simplicity, and the ability to communicate its value. Not many of us will comprehend the details of our hospitalization benefits or our insurance policy until we are warded, strapped to our hospital beds, and search frantically for that additional insurance cover presented in small prints.

Happy New Year and Good Health !!!

Will bonuses be pegged to (sub-prime) performance?

Singapore bankers upbeat about fatter bonuses
Business Times Singapore, 8 December 2007
By Chow Penn Nee
(c) 2007 Singapore Press Holdings Limited

(SINGAPORE) Despite market volatility stemming from the sub-prime crisis in the United States, Singapore-based bankers are counting on higher bonuses this year, and are optimistic about next year as well.

So says a worldwide survey of 20,270 employees working in financial services, conducted by eFinancialCareers.com, a global financial careers website.

The study found that slightly over half of Singapore bankers expect to receive higher bonuses than last year, and only about 17 per cent expect their bonuses to be lower than the bumper payouts of 2006.

Sarah Butcher, editor of eFinancialCareers.com, said: 'The expectation of swelling bonuses may be linked to the fact that Singapore-based bankers are paid less than their global counterparts. She added that the survey revealed that the average Singapore banker received a bonus equivalent to 44 per cent of salary last year, compared with 76 per cent in Hong Kong and 58 per cent in the US.

Hong Kong bankers share similar optimism about bonuses, with also slightly more than half of them expecting to receive higher bonuses than last year, and only 14 per cent anticipating lower bonuses.

In contrast, 60 per cent of UK bankers believe bonus levels will be down next year.

Globally, the survey showed that equity capital markets and M&A bankers are the most optimistic when it comes to predicting this year's bonuses. A BT report said investment banks in Singapore earned over 45 per cent more in the year to date than in the corresponding period last year, driven by growth in fees in mergers and acquisitions, equity capital markets and debt capital markets. Due to sub-prime woes, debt capital markets and credit-focused bankers are the most pessimistic, said the survey.

Bonuses are not the only thing Singapore bankers are upbeat about, as 42 per cent expect business to improve in the coming year. Bankers from China and Hong Kong are similarly upbeat, with 56 per cent and 41 per cent respectively, forecasting a better 2008.

By comparison, about 40 per cent of UK bankers expect business to worsen next year, while about one-third of US, French and German bankers also predict that conditions will deteriorate.

Ms Butcher explained: 'The notable optimism of finance employees in Asia is no surprise as the growth of industries amid China's economic boom has led to increased business activity and a climate of promise throughout the entire region.'

______________________________________

Asia Big Bonus Swindle

eFinancialCareer.hk, 3 December 2007

Asian bankers account for a growing proportion of bank's profit. But they are still short-changed at bonus time.

This year, the situation looks set to be worse than ever. Most US banks have lost packets through the US sub-prime crisis, meaning profitable local bankers are in danger of subsidising their struggling American colleagues.

Gary Lai, manager of front-office banking at recruiter Robert Walters Singapore, says Hong Kong and Singapore bankers employed at US and European houses are already prepared for the fact that their bonuses will be negatively affected as a result of the sub-prime fallout.

But is the situation really this dire? A recent study by international search firm Options Group found Asian bonuses are likely to rise by up to 5% this year. By comparison, payouts in the US and Europe are predicted to fall 10-15% and 5-10% respectively.

There are rumours that Asian bonus pools have been ring-fenced and won’t be reallocated to subsidise struggling divisions elsewhere. Nader Farahati, director at consultancy Oliver Wyman, told Financial News recently that Asian bonuses will not be reallocated.

John Jessen, the Singapore-based group CEO of headhunter Smith & Jessen, also doubts that Asian bankers will have to subsidise colleagues in the US and Europe.

Jessen says banks want to protect assets where they make the most money: “Asia is in such a build-out mode that no one wants to let their competition leave them behind.” He expects most hiring investments to flow eastwards in 2008, with trading floors in India set to double or even quadruple in size over the next two to three years.

The sentiments of bankers in other emerging Asian economies such as Indonesia, Thailand and Malaysia also remain positive, says Lai: “The general consensus seems to suggest that their bonuses will be healthier than previous years, as many of these economies started off from a low base and are experiencing strong domestic growth.”