Bonuses, incentives and pay for performance

A recent dust-up in the City of San Jose is an apt reminder that poorly designed incentive programs are easy to create, and the results can be a problem. Team San Jose (the non-profit that manages some of San Jose’s event centers) had an incentive clause in their operating contract that offered a significant bonus on an all-or-nothing basis against several criteria. All-or-nothing bonuses against several performance criteria can be easy to manage but are fraught with opportunities to be “unfair” in the end.

In this case, Team San Jose hit 100%+ on every criteria except event site utilization where they hit a bit over 80% instead of the goal of a bit over 90%. The reasons they missed had mostly to do with performance cancellations. In other words, they had the venue booked and the “talent” cancelled. As the “talent” was a San Jose city supported music group, this seemed a bit unfair to Team San Jose.

The City held a special Council meeting and ruled to pay the bonus anyway. Was this fair, I think so. It’s just that it undermines the entire program, which mitigates the value of an incentive program. In addition, nobody seemed to question why they would write (and why Team San Jose would accept) an all-or-nothing, multi-criteria bonus plan. I suspect next year’s plan will be similar as governments rarely learn from their mistakes.

How about you?

Mitch

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