Bloomberg Communications: The Gold Standard for Accountability in Bonuses

In my earlier post, I discussed the need for accountability in compensation and used the old partnership structure as an example of how Wall Street was held accountable in the past and could be in the future. This generated questions as to how to hold ordinary employees accountable in terms of pay. In many cases, making these employees partners is neither effective in terms of motivation nor feasible in terms of corporate governance. Is there another way to compensate employees with accountability?

An Actual Compensation Plan That Works

Bloomberg Communications, the financial information company founded by Mayor Michael Bloomberg of New York, has a compensation structure that is designed to encourage accountability for ordinary employees. The organization has grown quite successfully since its founding over 20 years ago and has avoided the FreePasser problem afflicting other firms.

Bloomberg’s Compensation Plan Addresses the Root Causes of FreePassers

The primary problem with FreePassers is that an individual’s compensation is not linked to the consequences of his or her actions. This is often a timing issue. A person is paid for work that is deemed beneficial to the company, but it is only later that it is discovered that the work actually had negative consequences. Unless a crime has been committed, it is virtually impossible to get any money back. Often, the FreePasser has left the company and is onto the next victim.

The compensation plan for Bloomberg vests bonuses over time. Bonuses may be awarded in a particular year; however, they are paid over several years with the ability to claw back later payments.

If a salesman has sold a customer a product that they did not need to make a sales goal to earn a bonus, possibly under false pretenses, the company has an opportunity to rectify the situation because part of the salesman’s bonus has been held back.

The Plan Addresses the FreePasser Mentality

Often, people act like FreePassers because they feel that they can get away with it. They observe the work environment and look for what is acceptable behavior. If they feel that they are rewarded for short-term performance at the expense of long-term profitability, they will act accordingly. The Bloomberg plan makes it clear what is important in the organization: its values. It says to employees that meeting a quarterly sales goal is less important than building a profitable, customer relationship. Thus, it can be instrumental in creating a new better corporate culture which guides the individual employee even when no one is looking over his shoulder.

There are many such business practices that were instrumental in building some of America’s top companies, but they have been forgotten or pushed aside in the name of short term performance. I will discuss more of them in future posts.

Tags: Bloomberg, bonus

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