Although I have personally benefited in the past from incentive compensation plans and those payments allowed me to do things in my life that would have been impossible without them, they are not a good idea. In my view the benefits are not outweighed by the risks and negative effects.
In theory they appear logical. If you want people to focus on certain things, if you want specific results or goals achieved, what better way than to hold out a carrot, in many cases a very big carrot; at the highest levels a carrot much bigger than base compensation?
What such programs fail to consider is human nature. That simply means that if you pay people to do something and especially if they gradually become dependent on that pay, some will do almost anything necessary to obtain it. The Wells Fargo debacle is a glaring, perhaps exceptional, example, but such actions occur in many ways large and small.
What is amazing is that companies often pay incentive compensation for results that are or should be part of the basic job and nothing extraordinary. Many such plans have poor measures and even subjective goals. In addition to risking unethical actions, these programs risk missed opportunities and long-term benefits. If you pay an incentive to do a certain thing, chances are the employee will focus on that and in the process possibly ignore other opportunities for savings, innovation, etc. anything that at the time is not being measured and rewarded.
What would you do if the choice was between a bonus equal to say, 50% of your base pay or a possible 3% raise for doing a good job? Rewards need to be tied to performance and results, but also the way they are achieved and their sustainability in some cases. Rewarding for short-term EPS growth at the expense of a more beneficial longer-term strategy is counterproductive.
I’m not a fan of Sen Warren, but she asked all the right questions of the Wells Fargo CEO. His statement of taking full responsibility is as meaningless as Clinton doing the same regarding her e-mails. Worse still is the stupidity and short-sightedness of such companies. Their action will result in new legislation, more controls, more regulations, more government involvement and less discretion to run ones business; just what large companies want to avoid.
This thing about ignoring human nature is not limited to compensation and corporations, perhaps the greatest example is in politics. Both the far left and the far right ignore human nature and human reaction in their policies and plans. If something is “free” do you care a hoot what it truly costs or how efficiently the money is used?
Full disclosure; during my working life I was a VP-Compensation and Benefits. I helped design compensation plans and I negotiated executive employment agreements.