Golden Handcuffs

Get your management team to focus on common goals with performance-based windfalls.

As a great believer in performance- based compensation structures that focus on the roles, responsibilities and individual goals of each team member, as well as the overall goals of the team, I’m also a firm supporter of super bonus incentive structures.

At KreditInform, the credit management solutions company I founded with my partners, all senior managers were part of a super bonus scheme. The company shareholders worked it out as follows: we identified the top executives who had the greatest impact on profitability, and we agreed to give away a certain percentage of the company profits to the management team.

Mitigating the risk

The obvious risk was that as soon as these bonuses were paid out, the recipients would resign – not an unusual scenario in the sales environment, where people are constantly on the move. To counter that, we implemented a programme that would encourage our managers to grow and mature with the business. We took a certain percentage of the profits each year and put this into a trust managed by external trustees.

Everyone who qualified for the super bonus had a say on incentive payouts, so it was a democratic and highly representative set-up. We would say we expected margins of x amount, and we had a budget of y. When that was attained and exceeded, a percentage of that amount (over and above their normal salaries and incentives) would be paid to the executives who were part of the scheme, but it would be paid into the trust on their behalf.

The shareholders and senior management would from time to time be in a position to bring other executives on board, provided the existing members were in agreement. Eventually we had in excess of ten executives who were sharing – at different percentages– the amount of money invested in the trust.

This was paid out in tranches as the investment matured over time, and remained in place for the life of the business. When KreditInform was eventually sold, the trust was liquidated and all members were paid out in line with their shareholding.

The payoff

This super bonus incentive vehicle did some extraordinary things for the organisation. It instilled a great deal of belief in the leadership on the part of the executives who were eligible. They knew that we were not in business just to make a short-term profit for ourselves. The trust enabled us to demonstrate that we were prepared to share a significant portion of the profits with people whom we recognised as drivers of the business.

Because we paid this incentive over a period of three years, job hopping was curtailed. It’s more difficult to exit a company when you know you are leaving behind R100 000 in the kitty for someone else.

As the shareholders of the business, the leadership team had to think very carefully about which levels of staff we allowed into the incentive scheme. But the reality is that as the business grew bigger and bigger, and profits soared, we opened it up to more employees. We were careful though, about the number of years they had worked for the company and their level of seniority. We brought on board people who had demonstrated loyalty because we wanted to show them that we appreciated their commitment.

As a result, we had many senior level executives who stayed with the organisation for years. They were drawn to a programme that enabled them to share in the profits, and they understood why these would be distributed over time, as opposed to being awarded immediately.

Setting the tone of the business

This type of scheme can be implemented in any market. Even in an economic downturn, a business has to make a profit to survive. Sharing those profits, though they may be less than they used to be, actually focuses your entire management team on increasing the business’s profitability. It’s common sense.

Although the profit motive should not be the number one driver of the business at the expense of the customer experience, as a motivator it can ensure that your customers derive the best benefits because your team will go the extra mile to close the sale and ensure customer satisfaction. It’s also worth remembering that senior executives set the tone of the business – they create the corporate culture.

When they go the extra mile, when they enter the business and commit to a long-term career, they encourage others to do the same.

This can dramatically lower the employee and executive churn rate, which is good news for any organisation. If you are thinking about implementing a super bonus incentive scheme, make sure you begin by defining the objective.

It may be to reward longevity, or it may be to recognise those who are maximising profit. It’s imperative to define the objective so that you can balance the reward appropriately.