Compensation Management is not for Sissies

Any of us who have had the pleasure of being responsible for compensation management can relate to some of the recent events at AIG, albeit on a smaller and hopefully less dramatic scale. If you’re not up to speed, this article will give you the scenario.

Here are some key excerpts:

The disclosures came as AIG was lambasted for about $450 million in bonus payments planned for employees at a business unit that lost $40.5 billion last year. The unit’s woes pushed the company to near-collapse, forcing the government bailout.

‘Something is terribly wrong with this picture, and the reckless behavior at AIG must stop immediately,’ said Rep. Elijah Cummings (D., Md.), in a statement Sunday.

He called on AIG’s government-appointed chief executive, Edward Liddy, to resign over the bonus-payments issue.

The reason we can relate is because this basic scenario occurs regularly at every company that uses variable pay to incent performance. That is, sometimes people achieve on their plans even though the business overall is suffering. And in many cases we have people who qualify for large payouts even though they clearly don’t deserve them.

Quotas can be set too low for a new product or within a new territory. The measurement criteria could be flawed, or there could be a major environmental occurrence that skews numbers.

In a former job I designed plans for a call center where we had both in-bound and outbound reps. The outbound plans had much lower quotas but the target pay and accelerator multipliers were the same proportionally across plans. One month we had a major marketing push drive our inbound calls to unforeseen levels. In order to keep up, the call center managers began rolling over the excess traffic to the outbound reps. This caused their performance to spike as a group. Since we had no way to distinguish between inbound sales and outbound sales, we decided it was safest to just go by the book and pay according to the letter of the plan. You can imagine my embarrassment when we had entry level call center reps getting paychecks larger than our executives. It was not a good month.

Going forward we definitely worked to not repeat our mistake. We built some governors into the plan around inbound traffic. We also committed to having better communication between marketing and the call center so they could prepare for marketing blitzes. In fact, we started meeting as a group regularly to make sure everyone was on the same page.

Fortunately, we weren’t being bailed out by the government at the time of this snafu or somebody definitely would have been fired, but the example highlights the hazards of variable compensation. If you create a plan that has some holes in it, you can get burned. There is almost no scenario where it is justifiable (and in some cases it can be illegal) to retroactively change a compensation agreement. I’m sure AGI previously didn’t have language in the bonus plans about government bailout exceptions, but I bet they do now.