Feb 21, 2022 | Governance, Management
Not all accountants are created equal, and not all do the same job.
All businesses have two types of information required, for which they need three types of accounting functionality.
There is the regulatory and compliance accounting, which can be a simple as the quarterly GST return for a small enterprise, to hugely complex set of statutory accounts for a public company, particularly when it operates in several jurisdictions.
Then there is the management accounting, the numbers used to manage the business on a daily, monthly, and annual basis. These are entirely different tasks, although use common data sources, the ledgers that record activity, and various devices and processes to collect the data for recording.
After making that distinction between compliance and management accounting, assembly of the range of skills necessary to deliver the outcomes is often overlooked.
Data assembly.
You need people to assemble and reconcile the data. These can be less qualified and experienced people, and the processes of collection and initial recording are increasingly being automated. Nevertheless, the processes that track and capture the numbers are vitally important to be proactively created, maintained, and improved. The rigor of the collection and ‘cleaning’ of data will determine the confidence that later processes can have in their numbers.
Accounting compliance.
Failure to follow the rules can result in legally enforceable penalties. Therefore, compliance is of critical importance for external stakeholders, but is largely irrelevant to the management of the business, for which an entirely different suite of skills is needed.
Analysis and presentation.
This is where accounting meets marketing. Either of the two by themselves will tell only a small part of the story. List the numbers and people will ignore them, or be asleep, no matter how important the words. Just use story and metaphor without the foundation of numbers, and you will be dismissed as a typical marketing person, fluffy and unreliable. It is a case of one plus one equals three. If you do not get this combination right, there will be suboptimal outcomes as the wrong decisions will be taken, opportunities missed, and resources misallocated. This third skill requires both the numeracy of the accountant, and future telling ability of the seer. An unusual and often derided individual.
In my case, my friends who are accountants run for the hills when I remind them, that I am in fact, one of them. Meanwhile, many marketers, particularly those under forty, think I am some sort of marketing troglodyte because I do not believe everything in marketing begins and ends with a digital solution.
As Peter Drucker pointed out all those years ago, “the purpose of a business is to create a customer“. The reason you do that is obvious: to generate revenue, from which you make a profit assuming the business is well managed.
Understanding and leveraging the means by which all the marketing jargon is converted into cash, is the core of a successful marketing function in any business. There are thousands of things every business can do without, and still function, the one thing no business on earth can function without is cash.
Therefore, marketing is about cash generation, short, medium, and long term, future tense. Accounting is about counting how much cash there is, where it came from, and where it went, past tense.
One without the other is suboptimal. When you find both in one person, do not let them go.
Feb 7, 2022 | Governance, Management
Successful people will tell you to concentrate on the things you can control, be aware of, and prepared for those you cannot. Stressing about those you cannot control adds no value, the best you can do is anticipate the impact they may have, and shape your response in advance.
Managing a business is the primary example of an environment where managers sometimes obsess about things out of their control. Meanwhile, they often ignore or undermanage those they can control, and that deliver sustainable returns.
There are many components to a successful business, the only one that is common to all is cash. It is like oxygen to people, we cannot survive without it.
Therefore, it makes sense to ensure that in every decision you take, part of the consideration is the impact on cash.
Too often I see decisions made, that on the surface make some sense, but when deeper investigation occurs, are counterproductive. The most common is the almost instinctive urge to drop price to meet some competitive pressure, usually accompanied by reassurances that volumes will be increased as a result. 4 times in 5, it results in less cash, and less profitability. Management is way too often surprised at this outcome.
There are 7 things you can control, broken up into two buckets represented by the income statement and balance sheet, that have a direct impact on your cash position.
Price
Volume
Margins
Overheads.
Accounts receivable
Inventory, or in a service business, Work in progress
Accounts payable.
The first 4 are recorded in the income statement or profit and Loss, which records the revenues coming in, and costs going out that are directly influenced by trading activity.
The last three are recorded in the balance sheet, reflecting the cash value of the business and are again directly influenced by management decisions.
Each of these 7 components are linked in a macabre commercial dance, every action on one can and often does, influence most if not all of the others to varying degrees.
It is the responsibility of management to manage these levers to deliver the maximum return to the business, and ensure that decisions made are in line with the strategic priorities.
No business can survive without cash, so it is incumbent on every employee, even if just in their own self-interest, to look after the cash of the business as if it were their own.
Feb 2, 2022 | Governance, Leadership, Management
The Reserve Bank released the latest inflation figures a week or so ago. The year-end number was 3.5%, significantly influenced by a few highly volatile items like petrol. Stripping those out, the underlaying rate was 2.6%. These numbers do not bode well for the RBA target rate of 2-3 percent average over time.
It would appear that despite the denials, the reserve will be forced into increasing the official rate well before their earlier undertaking not to do so until 2024.
From the graph in the header, should we sneak back to official rates above 6%, last seen in the late 80’s, we will have a cohort of managers making strategic decision in an environment they have never experienced.
That is not a good omen.
I well remember paying 17.5% rate on my first mortgage around 1983, an experience that will never be forgotten. The little equity I had built up in the previous 2 years since borrowing the money to buy that first house, was swallowed up while my very young family ate a lot of potatoes and sausage.
Managing a business in a period of inflation puts a lot of pressure on things the cohort of younger senior managers have not ever had to worry much about to still deliver acceptable returns. Now they will be faced with some nasty choices:
- Increase prices, annoying customers, and risking volume loss, and the associated relative increase in overheads.
- Annoying stakeholders by holding prices resulting in decreasing margins as inflation driven costs increase.
- Cutting costs which in a crisis normally means cutting ‘heads’, which rarely makes you popular in the lunchroom.
- Reducing investment in everything from advertising to R&D and new product introductions, which has the compounding impact of making tomorrow’s cash flow and profitability that much harder to generate.
The most usual course for the inexperienced is to generate lots of words, but take no or only ‘fence-sitting’ action until their options have closed in. They then stir into action with emphasis on the last two options, leaving it to the following leadership to pick up the pieces.
The much harder work of refining product portfolios, brand development, generating operational ‘flow’, ensuring strategic alignment, building resilient supply chains, process flow optimisation, business model innovation, and all the rest, should not be activities stimulated by some sort of crisis. They are the responsibility of managers always, but often lost, obscured in the better times when getting a bit fatter is the most common characteristic.
Header Image credit:. Source World bank.
Jan 26, 2022 | Change, Governance, Leadership
I am sitting here on January 26, 2022, contemplating another year gone, with the new one coming at us, wondering if anyone in power has ever heard Henry Ford’s quote: “If you always do what you have always done, you’ll get what you’ve always got’
Such was 2021, except we seem to have doubled down on the stuff that generated a negative outcome in the past, mistakenly betting on a better outcome this time. I looked back to the Australia Day post for 2021, and almost all of the issues aired remain valid.
Little has changed, apart from the date, and the conga line of politicians has evolved a bit. There have been a few political scalps have been taken, and a few resurrections in the national party that surely rival any spoken of in the good book!
New South Wales’s god-fearing Premier who took over in unusual circumstances in October 2021, said at the time: ‘I will take NSW to the next level‘ has been proved correct, at least in relation to Covid cases. He has put all our eggs in the almighty’s basket, and the almighty seems to be on holiday, or is perhaps isolated, as infection levels skyrocket.
Clearly the only way to reduce the reported cases is to reduce testing, while playing with the definitions of what constitutes a ‘contact’.
Monty Python would be proud!
In November, the report of the review into the parliamentary workplaces landed on the federal governments desk. This is in contrast to the yet to be seen report commissioned by the PM to be conducted by the head of his department on the specifics surrounding the alleged rape in the office of the defence minister in February. Clearly the stench coming from the big house is not what anyone should expect in the place that is supposed to be governing the rest of us, making laws about how we will behave, and the penalties for not doing so.
As we go into an election campaign, we will see a lot of the PM in high vis. being the daggy bloke from next door, telling outrageous porkies while looking everyone directly in the eye. Must be a learned skill, honed with extensive practice, as few are as good. Meanwhile, the opposition leader, despite a bit of cosmetic work with the glasses, hides from just about everyone. Probably a good strategy.
I can smell the baking pork from the coming election BBQ from here!
The trading relationship with China still resembles a pygmy kicking a giant in the foot trying to get his attention. The reality is that we have affronted the Chinese leadership, they have reacted, will not forget, and we can do nothing about it, beyond swallow the medicine and stop being stupid. A big ask, especially for some of the conservatives in the government who, perhaps rightly based on its sad history, believe there are votes in being belligerent. The narrative that Australia must ‘pick a side’ between the US and China assumes a binary world, when it is in fact way more nuanced and complex than that. It seems crazy to me that this is not obvious to those who find themselves in positions of political power.
I guess it is lucky we might have a few nuclear subs to use as a deterrent in about 30 years. Pity they require very deep oceans to operate effectively, and our area is surrounded by largely shallow ones. Sadly, they also require deep and practical nuclear engineering expertise to keep them operational, which we do not have, and are unlikely to ever develop to the level required. This is before we consider either the time before these mirages emerge from the deep, and there is any consideration of the anti-submarine technology that might emerge over those 30 years, making our subs very expensive coffins. Knowing a few very senior navy officers over the years, I am sure they pointed out these obvious facts to the politicians, who seemed not to be listening. Ah well, it must have seemed like a good press release at the time.
Climate change. What can you say about the triumph that was Glasgow?
Our dear leader speaking to a packed house at midnight, explained the ‘Australian way’ of tackling this global problem. It amounts to subsidising fossil fuel emissions and funding research into technology that has as much potential to capture meaningful CO2 emissions, as medieval alchemy had of turning copper into gold. Never mind: our supporters want, and are paying for the effort via party donations, just don’t let on to the taxpayers, which does not include the aforementioned political donors.
Some of this nonsense might be excised if there was a version of a federal ICAC. Clearly nobody in the big house wants such a body to examine the entrails of their shenanigans, it might be embarrassing. The first effort by the then Attorney general, later to be pushed towards the exit kicking and screaming after a nasty scandal involving, wait for it, a woman now deceased, was laughed out of the place. The simple fact that it was so obviously a piece of window dressing was made clear by the fact that the opposition was laughing at it as well. This is despite knowing they might have to live with the consequences of a beefed-up version, if they ever regained power.
The two-laned economy we are building where the benefits go to those in a position to charge economic rent, is continuing to significantly distort the choices made in the allocation of resources. As the gap continues to widen between the ‘Haves’ and ‘have nots’, as it will if nothing changes, it will at some point become toxic, as it did on January 6 last year in Washington.
As an illustration of our challenge as a competitive economy that will serve Australians more equally, we should consider the asymmetrical picture painted by the ASX top 10 in Australia compared to the S&P top 10 In the US. Our top 10 are all traditional hard asset companies, all from mining or financial services, with the single exception of CSL. By contrast, the US top 10 are all, with the single exception of Berkshire Hathaway, ‘soft’ asset, technology-based companies.
The rate of capital growth of soft assets is far greater than those of hard assets. Will 2022 be the year that it hits home that Australian industry is dominated by yesterday’s businesses, and we start to adjust? Fortescue (number 10 on the list) has just started to make those adjustments into areas that rely more on intellectual rather than financial capital.
Making any effort to bridge that gap between ‘New’ and ‘Old’ industries enormously more challenging, is the simple fact that Australian public spending on R&D has over an extended period been dropping. The total spend is being propped up by spending by business in specific areas of digital engineering, almost compensating for the drop in public spending. The total spending amounts to 1.8% of GDP, a number way below some of our international competitors. The OECD average is 3.4% of GDP. Our spending on education, the economy’s investment in the future, in the 2019/20 fiscal was 114 billion, around 1.8% of GDP, before the positive impact of $20 billion of ‘export’ sales to now excluded overseas students is removed. At the same time, the ‘quality’ of education has been dropping consistently. From the gutting of trade and technical education over the last 30 years, to the removal of teaching resources from universities as they are mandated to turn a short-term profit. The latest nonsense is to penalise the humanities, and favour STEM. While we do desperately need greater STEM education resources, it is insane to fund them by reducing our creative and behavioural education that enables the STEM output to be leveraged. While it is not just the amount of money we spend that is important, quality does count, when both are going in the wrong direction, there is unlikely to be a soft landing.
I cannot finish without acknowledging the continuing impact of the Covid pandemic. 2022 will no more be the end of it than was December 2021, and worse, we seem to have given up. Omicron is of less mortal concern than Delta, so we seem to assume that the next variant, emerging from the unvaccinated half of the world’s population will be less virulent again. Let’s hope it is so. However, if we look at very recent history, Aids, Ebola, Mers, Sars, none of them evolved to be less severe at each outbreak, they evolved to avoid the barriers we built.
Covid has been a catalyst for many other seemingly unconnected things happening.
For example, the disruption of our supply chains, firstly the international ones, and more recently the domestic ones. A month ago, a shortage of AdBlue looked like it was going to be a game stopper, and it still may be. However, more of a long-term threat is the closing of a number of (that I know of) significant regional transport companies. These companies, long established in places like Bathurst, Dubbo, and Tamworth, employ hundreds of people in support roles as well as their drivers, and service providers. They contribute significantly to local economies. The drivers are mostly blokes older than 50, who have never done anything else, but now will be lost to the industry. Difficult jobs like moving cattle, machinery, smaller multi-stop loads, will not be taken by the giants in the industry, who are just interested in moving pallets in bulk from point A to point B. In NSW the RMS has a lot to answer for. Dyslectic drivers who have difficulty filling in a totally unnecessary logbook, as trucks now all have GPS locators, without spelling mistakes cop a fine of $400 a time. This stupidity is just driving them out of the industry. In terms of supply chain disruption, we ain’t seen nothing yet!
In order to address the challenges of Covid and Climate change, politics has privatised the development and distribution of vaccines, and kicked responsibility for acting on climate change down the road. Stick the means to fight the problems in the hands of a few billionaires, and magically, the problem will be resolved. Meanwhile, half the worlds population remains unvaccinated, so the new variants have plenty of opportunity to find the weaknesses in our defences. The polarisation of the populations continues. Politics encourages this polarisation as it suits the coming election in this country, as it has in other developed countries. Politicians tell bigger and bigger porkies, each trying to outdo the other. Sadly, it seems the bigger the lie, the more likely there will be a vocal minority that believes and goes on to proselytise it, compounding the divisions, and compounding the erosion of trust and the concept of mutual benefit and accountability. Two weeks ago, a big bloke in a supermarket shopping centre lift very aggressively abused me for being stupid, brainwashed, and ignorant of facts because I was wearing a mask. Had I been a 70-year-old woman instead of a relatively large and fit 70-year-old man, it would have been terrifying.
I really need to finish and get the Barbie lit.
However, before I go, have you seen the photos of the former, as of today, Australian of the year Grace Tame giving the eye to the PM yesterday? I sense that she does not think highly of our dear leader. I suspect that photo, along with the one in which the PM displayed a lump of coal in the parliament, will get a lot of coverage over the next couple of months.
Have a great Australia Day, however you choose to see and celebrate it.
Dec 24, 2021 | Change, Governance, Leadership
The PM has made an absolute mess of it, bouncing from one headline to another like a clown on speed. You must give credit for the energy, pity it is expended on trivialities rather than tackling the big questions.
The government has changed tack in the face of the coming election, they cannot any longer claim to be the better fiscal managers of the economy, better husbanding our tax money in the face of the huge deficit, largess to corporations under job keeper who did not need or qualify for it, and the massive pork barrels rolled out over the past few years. $1.9 billion to government seats, while labour held seats received $530 million. The most recent report being a review of 19,000 grants in a ratio grossly favouring government seats published by the SMH. The one I live in, the marginal seat of Reid in Sydney, has received $14.8 million, so the member will be crowing about how effective she has been. To be fair, she does seem to have been a smart and engaged local member with an impressive academic and community engagement resume, as well as a solid foundation of common sense. The neighbouring seat of Grayndler, held by the opposition leader, in at least as needy a place as Reid, received $718,000. Will it be enough to save Reid for the Liberal party? Who knows, but amongst my peers it is the solid view that a vote for an effective and moderate local member is also a vote for an ineffective, narrow minded, spin driven and vindictive Prime Minister. If this is the state of governance in an area with publicly available information, heaven knows the mess that those areas, increasingly protected from public view, is in.
In March the Royal Commission into Aged care dropped onto the table, detailing a chronically under-governed industry making the privatised providers a fortune at the expense of the most vulnerable amongst us. It is a wrangle between the feds who regulate aged care, and the States who fund it, nobody carries responsibility. On top of the deaths that occurred in Victoria from Covid mismanagement, it is surprising that this has been wiped off public awareness. It is an ongoing disgrace. Perhaps it is the result of the monumental cock-up the feds made of the vaccine rollout in the early part of the year, and the wrangling the went on amongst the states that has wiped the Commission’s findings from public condemnation.
There was a gabfest in Glasgow, which seemed to be useful, apart from the lack of contribution made by Australia. Sadly, the PM made his ground-breaking presentation outlining ‘The Australian way’ to a packed house of a cleaner, sound recordist and journalist who copped the ‘dog watch’ and was probably asleep. Even the hecklers were too disinterested to show. I continue to find the contrast between the reliance on the science in relation to Corona, and the total dismissal of the science in relation to the reality of climate change, a complete mystery.
Then, just as we thought the worst was over, along comes Omicron, and once again, we are caught with our heads up our arses. My old dad used to say everyone made mistakes, but only a retard made the same one twice. The federal leadership must all be retards by that measure.
At the state level, there has been wholesale leadership change in NSW, and it has become very clear that premiers vowing to keep their states sovereign is a winning strategy. I conclude that the winning is only because of the total leadership vacuum coming from Canberra.
The Covid battle, seemingly being won towards the end of the year, has suddenly in December been put back on the agenda, this week blowing up with record cases being identified. The emergence of this new, hyper-spreadable omicron version may yet force punitive action to again stamp on human beings doing what they need to do for their own psychological well-being, congregate and communicate in person. As I write this on Christmas Eve, new Covid cases are comfortably over 5,000 a day, a level that a month ago would have induced panic amongst NSW politicians, but now seems rather ho-hum.
Rorts have become so common, they are almost ignored by the media and voters, apart probably from that modest percentage of voters who are deeply engaged and angered in the process. There have been plenty to pick from. Almost $300 million given to Australia’s largest companies who actually increased earnings during the lockdown seems just so wrong. Another 6.2 billion was forked out to businesses with more than 10 million in turnover that did not meet the 30% fall in turnover threshold in the first 6 months of the scheme. Meanwhile, small businesses are closing, and those in the arts, a foundation of our cultural life are left to their own devices. Despite the faults and rorts, the money pumped into the economy has been essential, and cushioned the Covid induced fall in activity that happened.
The ‘Merde massive’ perpetrated by the government unilaterally tearing up the submarine contract then lying about the circumstances leading up to, it leaves Australia looking like an unreliable partner. Not much antidote to our trade problems there, coming as they do on top of the idiotic rattling of our tiny sabre towards our biggest trading partner China. Let’s hope they are sufficiently gentlemanly to hold off until we have our new subs, about the time my granddaughter will be retiring.
What about the leadership wrangling in the junior government partner, the National party, giving us Barnaby back as deputy PM. Clearly, Barnaby and the usual PM can barely stand to be in the same room, not a recipe for good governance. Nobody seems to like the Nats, outside of the few seats they manage to hold, which I suspect will be subject to aggressive independent focus in the lead up to the next election. Speaking of which, many of the sensible moderates in the liberal party will be up against it, as they struggle to publicly support climate policies they must privately consider no better than wishful thinking by a few recalcitrant nig-nogs.
Amongst all this, the Liberal Government discovered belatedly that the culture in and around parliament house stank. In fact, it stinks so much that in any other workplace, executives would be fitted for striped suits and shipped off for an extended holiday at public expense. This has been very inconvenient in the early stages of an election runway for some time early in 2022. However, the PM is making the supreme effort to put it all behind him as he massages messages, and the truth. I wonder if the report, promised to be public, commissioned by the PM from his departmental secretary investigating the accusation of rape in the defence ministers office will ever see the light of day? I guess not.
More broadly, despite the covid induced trading environment, property prices in Sydney and Melbourne have gone mad. Lots of people taking advantage of the historically low interest rates, ignoring the consideration of what happens when interest rates go up. The reserve bank governor after reassuring us they will stay low for several more years has recently softened his language. This leads to a conclusion that we will see them creep upby the middle of next year, which could lead to a middle-class bloodbath. Please note, I am absolutely unqualified to make this prediction, but common sense does dictate an increase soon.
Meanwhile, Small Business struggles to generate revenue, pay wages, and keep the place going. A quick look around most shopping areas at the closed retail outlets, and industrial parks at the locked factory units will tell you how well that is going.
The war (or was it another ‘police action’?) in Afghanistan is over. Pity about those Afghans left there, particularly the reviled Hazaras who are paying a high price for our so called ‘principles’. Australia played its part in the deception of those in the region, and ourselves, right from the beginning of the mess when President Bush decided to punish Al Qaeda after 9/11 2001, and invaded Iraq. The excuse was the non-existent WMD, which had nothing to do with 9/11. We ended up 20 years later with an ignominious withdrawal from Afghanistan after massive expenditure of gold and more importantly, lives.
The Americans managed to get rid of their President in the November 2020 elections, with Biden taking over in January, but not before the US Capitol was subjected to scenes reminiscent of a coup in some South American backwater. The dangerous sniping from the sidelines by Trump continues unabated, but it appears to me that fewer beyond the rotten heart of the republican party are taking notice every day.
Division throughout the developed world has seen the rich get richer and the gap widening to all the rest over the last 12 months. Social media has played a role in this, and the backlash will lead to regulation of some type. In the US, Congress is starting to consider how they go about this. Problem is, very few of them have the foggiest idea, so the potential for stupidity is substantial. Europe has had a try, but the GDPR (General Data protection Regulation) regulations have not slowed down the rates of ‘anti-social’ material by much, largely because the main platforms are US owned. Australia’s pathetic attempt to fund journalism becoming law in February by forcing social platforms to pay for news content, has just helped News Corp to fatten its bottom line. Facebook demonstrated its contemptuous corporate power by shutting down in Australia for a day, reminding everyone that they were the biggest bully in the playground. This dog is best repealed, quickly, and replaced by some sensible measures drawn up with the public interest in mind.
Supply chains around the world have been ripped apart. If you can get a container delivered to Sydney or Melbourne it will cost you 4 to 5 times what it cost a year ago. Imported finished products and raw materials are in short supply, and prices have skyrocketed. There is a real possibility our trucks will stop progressively in the absence of AdBlue, an additive made from urea, an ingredient in fertiliser. Australia’s only producer Incitec Pivot is closing its Brisbane factory because they cannot get a reliable gas supply, ironic given Australia is the biggest supplier of LNG into the world market. China makes 83% of the world’s supply of urea, and needs it in the domestic industry, so no more exports, and the rest of us can get stuffed. This is an example of economic power being wielded by what is on some measures already the biggest in the world, and on target to be the biggest on all measures within a year or two. This assumes that the fragile Chinese financial system does not crash, that an economy controlled by a central power can defy the laws of economics as we currently understand them. Russia failed 40 years ago in a similar experiment, but I suspect the Chinese are smarter, and have learnt the lessons of history.
I have missed a lot; it has been a busy and eventful year despite the successive lockdowns. Let me know what the two or three things you felt were most important to you.
I have tried to think of good things that happened, thought I would leave them to the end. Well, here I am, at the end, and I cannot think of any. Must be some, help me here.
In any event, have a safe and merry Christmas, and come back in 2022 looking for some improvement personally, professionally, and in our communities.
Thanks for reading, commenting, and sharing this year, or even if this is the first dose, make it the first of many.
Merry Christmas, and have a great 2022, a low bar to be better than 2021
Allen.
Dec 8, 2021 | Governance, Management
It is bonus time again, approaching Christmas. Many businesses have some sort of bonus scheme that matures at this time of year and are wondering if it is worth the effort.
Does it give you a return on the investment of time and money, or is it just an expected part of employee’s salary? Does it have the potential to result in disgruntled employees when they do not get as much as they expect or think they are worth, or worse, are angry that someone has got more than them?
Both are very common problems.
Conceiving and managing a bonus scheme is a really tricky management challenge.
We tend to give bonuses with little consideration of the psychology behind what makes them work, under what circumstances and in what contexts. We tend to take the easy way, which is just to tie it to a combination of increased revenue, some dodgy assessment of performance done by the manager, and profitability.
If you have a bonus scheme and want to see how they work best, go down to your local club that has pokies, and observe those playing. Compulsive, repetitive, continuous, despite knowing in the long term they cannot win, but the short term, they just might. This is the sort of behaviour that if mirrored in your business may be very productive in the short term, and destructive in the medium to long term.
Context is very important. For tasks that are repetitive, often referred to as ‘left brain’, financial rewards do increase productivity. Conversely, once an element of ‘right brain’ the source of critical thinking, creativity, nonlinear outcomes is required, financial rewards not only do not increase productivity, but they can impact negatively.
A bonus scheme that acknowledges these differences, and delivers has five parameters you need to consider, and work with to produce the best combination for your circumstances:
- Type of bonus. Money or in kind? Money is usually the default, but in kind can be a powerful motivator, and is less likely to be dismissed just as part of the salary package. You could offer a dinner out with their partner, gift vouchers, a cruise, some local adventure, there are many and varied options. Most will be more effective than just money in most circumstances.
- Eligibility. Who is eligible, how is the eligibility for the bonus to be measured, collated and communicated? Is it for the individual, the work group, or whole company, is there a qualification period, is it the same for everyone irrespective of rank, or is it on some sort of sliding scale? A field of landmines to be navigated in making those choices.
- Measurement. Is the measurement quantitative, qualitative, or a combination of both? What are the administrative processes that will manage them, and keep it consistent? How transparent will the results be?
- Frequency. What is the frequency of the bonus? Is it monthly, quarterly, annual, on an agreed timetable, or are the time lapses between bonus occasions random, as are the rewards you get out of a poker machine?
- Reward type. Are the rewards themselves random, or against a sliding scale of value. Usually this will be cost, but when giving in kind bonuses, what is value to one person may not be to another. For example, a former client who was an avid racing enthusiast offered time in a go cart in the west of Sydney as a bonus. To several of his employees, the thought of racing a go cart was as far from a bonus as they could get, the thought of winning was a disincentive.
There is a huge body of psychological evidence underpinning the drivers of behaviour, and we are learning more every day. The best known are Ivan Pavlov, who recognised in the late 1800’s that specific behaviour can be stimulated by a cue that the ‘subject’ associates with the behaviour. You see this every day, as people respond to such things as a ringing in a theatre to announce the end of interval, the traffic lights at the end of your street, and so on. It is a learned behaviour in response to a cue. The second is B.F. Skinner, who in the 1950’s recognised that variable rewards were more powerful than those that were known, aka, the poker machines. More recently, Daniel Pink has written extensively about the mismatch between what science knows about motivation, and what business does.
Header credit: Once again, the wisdom of Dilbert graces the header. My continuing thanks to Scott Adams for creating the cartoons that explain my thoughts.
