This CEO Wants You to Know Bonuses Don’t Drive Performance

This CEO Wants You To Know Bonuses Don’t Drive Performance

Kris Duggan is the CEO of Betterworks, a software company based in Redwood City, CA, that provides customers with an enterprise platform dedicated to goal setting.

With around 200 enterprise clients and about two and a half years of road behind them, the start of Duggan’s latest venture had its roots in his experience as the CEO of a former business. He, like many other executives, was searching for a better way to engage his entire team in the goal setting and goal management process.

Duggan has primarily utilized the Managing by Objectives (MBO) approach in several previous companies. And it’s the same process he has used at Betterworks.

Until now.

With his company scaling from 80 employees to approximately 130 in the next year, he made the decision to eliminate MBOs from the Betterworks compensation model altogether. But, why?

What is Management by Objectives?

This CEO Wants You To Know Bonuses Don’t Drive Performance

“Management by Objectives” was first coined by Peter Drucker in his 1954 book, The Practice of Management, and was further developed by theorists like Douglas McGregor and George Odiorne. Management by Objectives is essentially a performance appraisal process that involves managers setting goals in tandem with their subordinates, working together to set specific and measurable goals that both the employee and company work to achieve within a set amount of time. When employees meet or exceed their goals, they are often rewarded with a monetary bonus.

MBOs have become an integral part of business today, and many organizations continue to use them as their primary performance appraisal and goal setting process.

But Kris Duggan is not the only CEO to question MBO’s effectiveness in today’s rapidly evolving work environment. Many executives are now beginning to take a hard look at their goal planning and compensation plans, and whether bonuses are truly driving the performance they desire. In fact, a recent survey from Willis Towers Watson found that only 20% of employers in North America say merit pay is effective at driving higher levels of individual performance.

The Problem with Bonuses

From Duggan’s perspective, two trends in the last decade are forcing companies to rethink the ways they manage performance appraisals.

Trend 1: Peoples’ expectations about work have evolved dramatically in the last 20 years.  Back then, most people focused primarily on financial incentives and perks over other types of compensation. Many workers today are more concerned about (and recent research supports) a clarity of purpose and meaning in their work as well as an opportunity to continue to learn and grow.

This evolution in peoples’ fundamental needs from their work makes the MBO process ineffective, as they tend to be blunt instruments driving behavior that focuses on financial incentives rather than the shifting priorities of the workforce.

Trend 2: The nature of work itself is changing. The days of working in silos are becoming fewer and fewer as many work situations require a collaborative approach. Coordination and integration across work groups is critical in most current work environments to ensure success.

“The way in which MBOs are practically implemented creates so much disruption and noise within an organization,” adds Duggan. “There is a strong argument to fold bonuses into salary and set stretch goals without trying to break down financial incentives to try to drive what amounts to nominal behavioral improvements.”

There are other problems with performance appraisal systems like MBO, too. Managers and employees alike may feel as though they must commit to unrealistic goals. And, if/when those goals aren’t met, employees can become resentful; unmotivated to try and meet their goals again.

Further, many of these goals are more for the benefit of the company, rather than the employee’s deeper motivations. The individuals’ goals may not align with those of the organization, which proves to further disconnect employee performance from the company’s strategy.

A Better Way to Drive Performance

Is there a better way? Here are four things to consider if you’re grappling with similar challenges in your own organization.

  1. Consider People’s Personal Goals and Psychological Needs. Goals that focus on job performance alone don’t consider the deeper personal or psychological needs of your workforce. What is it that intrinsically motivates them to get out of bed every morning? Why should they care about coming into work every day to punch the clock and work toward a performance goal that has little or nothing to do with their motivations? When setting goals, make sure they align with what your employees truly care about. This method must be highly individualized and requires leaders to develop a deep understanding of the people on their teams.
  2. Find Alternate Methods of Motivation. Money talks, but according to Gallup research, it isn’t going to keep your best employees around forever. 44% of employees say they would consider taking a job with a different company for a raise of 20% or less. And when employees are disengaged, the percentage who would consider leaving for a 20% or less raise jumps to 54%. Clearly there are many other factors to consider for employee engagement and retention.
  3. Create Development Opportunities. Focusing solely on meeting a set of objectives at the end of the year is problematic, especially without adequately providing development opportunities to your team. Without coaching and ongoing development, management and employees alike may feel like they’re beating their heads against a wall year after year with the same results. Push people to strive for excellence, but ensure that formal and informal opportunities exist to support people’s development.
  4. Measure and Evaluate Progress More Frequently. Rather than relying on an annual or quarterly meeting to evaluate employees’ performance, consider breaking the larger goals into smaller, more immediate milestones. Implement ongoing, continuous conversations with team members to keep them on track and motivated toward their bigger annual or quarterly goals.

While the jury is still out on the best methods for setting goals and managing and rewarding performance, there are some organizations like Betterworks that are focused on pushing the boundaries of our collective understanding in this space. There may never be a one-size-fits-all solution to such a complex and ever-evolving challenge, but experimenting, learning and sharing across organizational boundaries gives me the sense that we’ll be seeing some very interesting new innovations in practice over the next few years.

This article originally appeared on Forbes.

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Chris Cancialosi