Bonuses and Human Nature

I was conducting an exit interview for the owner of a mid-sized business when I came across an interesting example of human nature at work.

The owner had been told that the individual was leaving for a greater financial opportunity elsewhere, but thought there was more to it than that. When I interviewed the departing salesman, he told me that he was moving for a greater financial opportunity elsewhere. Full stop. When I dug a little deeper, I found that there was just a little more to it than that.
"Your guy is leaving for more money," I told the owner.
"But I offered to match, even top, the offer he was given," wailed the owner. "There must be more to it than that."
"Well, yes - kinda. He told me that you have a cap on bonuses here."
"Yes."
"So his bonus kicks in at 80% of target, gets really juicy at 101% of target, but cuts off at 120%. Is that right?"
"Yes."
"Why?"
"Why? Well that's obvious isn't it? Otherwise he'd be earning more than anyone in the whole company! Including me!"
"But surely if he's the guy bringing the majority of the business into the company, he deserves to earn the majority of the money."
"Hey hang on a second here! I founded this company. I built it from the ground up. Without me, there'd be no company. No product for him to sell, no customers to call on ..."
"And without him, you'd still have to deal with all the grotty aspects of selling. All the waiting. All the cancelled appointments. All the rejection and rudeness. Put yourself in his shoes for just a moment. If you'd hit your 120% maximum by, say, October; what possible incentive would you have to keep on selling until Christmas?"
"Ummmm ..."
"Wouldn't it make more sense for you to hold off on any new business until January?" [I recently heard of a guy in the IT hardware business who used to send his customers off on a merry chase for mythical new technologies in these situations and then reel them back in in January.]
"But ..."
"Did you ever hear the story of how the Communist government in the Soviet Union increased agricultural productivity? They issued a decree that once the quota had been achieved for the collective, farmers could sell some of their excess product locally. Productivity soared. I seem to remember the same thing happened in China."
"But ... Ummm ..."
"If you hire someone to replace this guy on the same terms, and you're honest about how the bonus system works here, then anybody who agrees to work on those terms will be a fool. Do you want to hire fools?"

How about if your bonus scheme worked like this?

• A piddling amount for 80-89% achievement.
• A piddling, but not insulting, amount for 90-99% achievement.
• A healthy chunk of change, plus 2% commission for 100-109%.
• Serious money, plus 3% commission for 110-119%.
• Truly vulgar money plus 4% commission for anything over 120%.

As long as you, the owner, had the majority say in the forecasting and target-setting process, you couldn't be stung by your sales guys hedging on their targets with low, low forecasts.

If you recognise that there is no interest like self-interest, how can you lose?