When I worked at General Electric in the engineering Product Cost Takeout role, management got an idea to incentivize us to save the company as much money as possible.
As it was initially presented to us (verbally), the company would pay engineers 10% of the annual savings from our cost-reduction projects as a one-time, year-end bonus. It was early in the year, but I was already lining up about $800,000 in cost reduction projects in the queue to be completed that year.
I thought, “If all goes well, this might translate into an $80,000 bonus.”
For a young guy, early in my career, this was significant. I’d like to think I would have worked diligently on my projects to ensure they were successful, regardless of the bonus, but incentives are powerful.
As the year progressed, it became apparent to management that they might have over-promised on the announced rewards. Some engineers were on track for bonuses in excess of double their normal annual compensation. Management looked at our mouths and decided the original carrot was clearly too large for us to chew. So, they ratcheted the bonus down from 10% to “more like 5%”.
Sorry about that guys, but that’s still a great bonus, right?
Some months later, probably after management realized they hadn’t actually budgeted for the bonuses as proposed (apparently, it was just an idea), the expected rewards were once again reduced. This time, to “an appliance of your choice”.
From $80,000 to a kitchen appliance is a substantial reduction in incentive compensation.
Never fear, my colleagues told me. They had been around longer and knew of an obscure, low-volume, sub-zero refrigerator model that would still allow us to beat the system. It sold for $10,000+. It’s not what was originally promised, but it’s still a chunk of change. New game plan… that’s the appliance we would choose… and then immediately sell it. The details of how this would transpire hadn’t fully developed in our minds, but nevertheless, it seemed a good plan.
As we neared the 4th quarter, management had a change of heart again and decided they couldn’t offer an appliance-of-our-choice bonus. Clearly, an informant had leaked the ingenious sub-zero frig plan. They didn’t mean a $10,000 appliance. They meant, “How about this lovely, low-end microwave? That’s cool, right?”
The reward then became nebulous and the logic sounded something like, Maybe if we don’t talk about it for a few months, everyone will forget the whole awkward incentive black hole and move on with life. “Yeah. OK. That’s it for this meeting. Everyone back to work.”
I closed the year with six projects totaling $860,000 in annual, residual savings to the company. It was a great season of productivity for me. One in which I proved I was able to navigate the corporate processes and successfully manage projects across several functional teams. I also discovered I was gifted at project management and execution.
For my year-end bonus, management presented me with a $20 cordless drill with great fanfare. Recognition for a job well-done.
That was the day I knew I would leave GE. And I did, not long after. It wasn’t the $80,000. It was the principal.
A Deal is a Deal
If we decide to incentivize our teams, we must follow through with the terms. Which is to say, we should be very careful about how we setup and announce our corporate incentives.
We must also be open to employees earning considerably more money than he or she did the previous year, perhaps even more than the Founder. If we align incentives properly, we should all be happy about huge individual successes because it’s also beneficial to the company at large. That’s the whole point.
The last thing we should do is negatively incentivize someone by changing the terms of their incentive compensation midstream. To the employee, this feels disingenuous, even duplicitous. When this happens, without exception, the company suffers a loss of credibility and alienates great employees. In other words, a deal is a deal. Re-trading on a previous agreement is a breach of trust with long-lasting reputational damage beyond a single disenfranchised employee.
This is not a new concept. It is better that you should not vow than that you should vow and not pay.1
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Great story. I’ve seen these incentive plans before, and they do work great for the company with gifted employees that chase the results. While I haven’t watched a company back down on the incentive, I have seen arguments over projects that clearly save the company money but determining the attribution metrics is harder than originally thought.
Worked for a great company right out of college – enjoyed the work, my colleagues, and the owners. Despite that, I was there maybe 3-4 years and starting to seriously wonder if the compensation package would ever ratchet up at a pace that I felt would be commensurate with the level of responsibility and sacrifice I was being asked to make. Around that time, an employee who had worked for the company for most of his life was retiring. At a company wide meeting he was honored with a brand new, top of the line, golf club as a retirement present. Despite the fact that he was an avid golfer and the club was probably a ridiculous amount of money (for a golf club) – right then and there was when I knew my days as an employee (of any company) was numbered. Even though I am sure it was meant as a token of appreciation (and received as such) and while I am sure this employee had been compensated well and thoughtfully throughout his career, there was just something about the fact that a golf club was the reward for a lifetime of loyalty and diligence that made me re-examine my investment as part of any corporate structure where I didn’t have any equity.
Eric – your first career experience mirrors mine. I would echo very similar thoughts.