Bonus culture, Barclays and me

The LIBOR scandal struck a particular chord with me this week. Everywhere you look in modern day Britain, targets, league tables and bonuses dictate our lives. Schools, hospitals, any Public Sector activity you care to mention has succumbed. The trouble is the culture created by this regime focuses the attention and creativity of employees onto self-preservation and wealth creation.

Let me illustrate with an example from my past. I was a Senior Leader in a repairs company. We wanted to improve performance, so prevailing wisdom told me to incentivise our Contracts Managers and Operatives to reach performance targets. Managers were targeted on the profitability of their contract and operatives were targeted on the number of jobs they completed. The theory of course, was that if each Contracts Manager hits their target, then the company would also hit my profit target (5% better than last year of course). This kept the Bank Manager happy and gave me a nice share of profits. Everybody wins don’t they? What was that about the customer? Well, we did a good job for them anyway and profitability is the same as efficiency isn’t it?

Year one of the bonus scheme was pretty damn good. Profits were high and managers and operatives alike were pleased with their pay boost. Of course, I was too far away from the work to understand how they did it at the time, but some managers turned in excellent profit figures for their contracts. Some operatives showed fantastic completion rates for jobs. Strangely though, some of our clients were starting to grumble and so were some of the managers and operatives; the ones I thought were the better, more conscientious ones.

The problem was that the targets and bonuses didn’t quite shift performance in the way I expected. Given that I had already designed and set the systems they worked in; set the contract prices that we charged; set the number of operatives that we could afford and given them (completely useless) PDA’s to use, how exactly was I expecting them to magic a 5% efficiency saving?

If you were one of my managers or operatives and realised that you couldn’t actually change anything in the system to meet your target, what would you do? You know how important the target is to the business and your boss. You do actually care about the business and you want to progress in your job. Your boss pays specific attention to profits and job completions, so they must be really important. Given a set system and pricing, how could you please the boss and make your bonus? Cheat, bend the rules, massage the figures and make your bit work to the detriment of others probably sums it up. Here are a few examples to illustrate my point;

The best operatives were usually shared around, to complete the repairs that most needed their expertise. Now though, managers were finding excuses to keep the best staff working on their own sector of the business. Great for their personal targets, but not so good for the other customers that needed their specific skills to complete their repairs.

Rather than focussing attention on improving the effectiveness of repairs, managers’ time was spent eking out works in progress to improve monthly figures. Creativity became centred on finding gaps in the contract, where costs could be taken out of the fixed-price element and charged as extras to the client.

And what about the operatives and their bonus to complete as many jobs as possible? Remember that they were under pressure from their managers and were constantly being told that the most important thing was to get as many repairs completed in a day as possible… Given the choice of spending time to complete the right repair, or doing something that will provide a quick, temporary fix, which do you think many of them chose? Worse still, when faced with a more complex repair, the less scrupulous operatives would make their excuses and re-book the job for a later date; the easier and quicker the job, the more lucrative it was. Not quite so good for the customer left without heating and hot water though…

Ah yes, the client; remember them? Is it any wonder they were starting to grumble? Interestingly, the better operatives were also the ones who were most vocal about the way the work was being carried out. You see, they cared about customers and reputation and were rightfully repulsed by the system they found themselves in.

By year two, the truth was showing through and the bonus system started to fail. The daft thing is, that we started thinking how we could improve the targets to change the emphasis. Only later did I realise that there is no such thing as a good target.

There are plenty more examples of the behaviour brought about by my targets. I also guarantee that you will find similar behaviour in the majority of repairs services up and down the country, because they use the same targets and bonuses to incentivise their staff.

All of which brings me back to bankers cheating the markets by making false declarations about the rate that their bank borrowed at. This led to Barclays appearing to be in better financial condition than they actually were and allowed traders to make money by speculating on the rate changes. Be under no illusion, the blame for the alleged cheating of the LIBOR lies fairly and squarely with whoever set up the current culture of Barclays. A culture that put profit and shareholder value above all else. A culture designed to encourage and enable employees to make significant, personal, financial gains from manipulating markets. A culture that forgot the actual purpose of a bank. A culture based on targets and bonuses.

While reading the articles on Barclays, @systemsthinkingreview was pointing me to an article in the Telegraph about exam boards dumbing down their exams. Why were they doing this? To make their exams more attractive to schools than their rivals. Why would an easier exam be more attractive? Because schools need to improve their pass rates to meet (and I think you’re ahead of me here)… Government targets.

Targets, bonuses, league tables and any associated method of directly linking performance to reward will ALWAYS lead to cheating and anyone who thinks otherwise is kidding themselves. Not only that, it sub-optimises the overall performance of the organisation and causes costs to increase and profitability to fall. I was to blame for the culture I created in my organisation and Bob Diamond must take similar blame for the culture at Barclays. I found a better way to run a repairs service, is anyone brave enough to do the same in banking?

If you want to know more about the flawed theory of targets, then look here; , where you will find an excellent analysis of the topic.

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