Should I incentivise with bonus, salary… or something else?

Dear Aunty B,

I am a serial entrepreneur and am starting my third business. In my first business, a software development company, I put my key managers on a lower salary and a bonus system. That worked well until we went into a dip and manahers got demoralised. In my second company I decided to do the opposite. I paid high salaries and small bonuses.

Problem was they were not as motivated. Third time around, what should I do? 

Stuck,
Newtown, NSW

Dear Stuck,

Well, if you can solve that one you can have my job.

The problem is that different people are motivated by different systems, so it’s hard to generalise.

It is probably good to look at some research. In the book Good to Great, the author Jim Collins says he has found no systematic pattern linking executive compensation to the process of going from good to great.

He says the evidence does not support the idea that the specific structure of executive compensation acts as a key lever in taking a company from good to great.

Collins says he looked at salary versus bonus, cash versus stock, long-term versus short-term incentives… and found that the good to great executives received slightly less total cash compensation after 10 years than the still mediocre companies.

It wasn’t that compensation was not important. It was just that once something had been structured that made basic sense, the moral code of the managers required building excellence for its own sake. “You are no more likely to change that with a compensation package than you are likely to affect whether they breathe.”

So this was his conclusion: “The good to great companies understood a simple truth. The right people will do the right things, and deliver the best results they’re capable of, regardless of the incentive system.”

So the purpose of a compensation system should not be to get the right behaviour from the wrong people, but to get the right people in the business in the first place.

Studies of fast growing companies in Australia show a similar pattern.

Kosmas Smyrnios, director of research in marketing at RMIT University, has studied the characteristics of fast growth companies, and says that entrepreneurs use a whole range of incentives. But most are not based just on financial pay. “They do a combination,” he says. While they provide average salary packages and some cash incentives, they stress the positive culture and the fun side of the business. They give them time off to be with young families and provide a culture where flexible start and finish hours are accepted.

The research shows that it is about leadership and culture more than financial incentives, and it is these that matter in the long run, Smyrnios says.

So my advice is this. Set up a strong culture and vision with high success fees and a clear contract. If you have the right people, then their passion and professionalism will ensure that they will take your product into new areas for good reward for their innovative strategy and efforts.

But also be prepared to employ different strategies for different people. One size doesn’t fit all.

Love to hear from SmartCompany entrepreneurs – what do you find works? Email to auntyb@smartcompany.com.au