Reward and Punishment

2019 Series Management Unleashed Article 4

Reward and Punishment
This article was first published in Business Times on 16 February 2019
By John Bittleston

How should you pay people? As little as possible needed to retain them? As much as possible – without bankrupting the business – to stop them leaving? Both these require judgment that, correct at one moment, will be wrong the next. Moreover, the tittle-tattle of gossip is nowhere more virulent than over pay. Possible withholding of Lloyd Blankfein’s Goldman Sachs bonus over the 1MDB scandal was more newsworthy than the Trump-Kim Jong Un Potential Extermination Meeting.

Encouraging the right type of behaviour

In Cerebos Pacific Ltd, I had an unusual system. I paid people what they asked. There were, needless to say, certain conditions. The most important was that everyone’s wages, bonuses, stock options and terms, including mine, would be displayed for all employees to see. Transparency is what the world is asking for. Didn’t people object? Yes, for three weeks. Then they realized how well off they were.

I only ever had one fight over terms with one of my senior managers. I asked him to have a Mercedes car, to improve his and the company’s image. He wanted to keep his more modest personal car. I insisted. He was Singaporean Chinese. I am Ang Mo. Fortunately, word never got out or I fear we might both have been locked up for insanity.

The bonus arrangements were even more revolutionary. Each of our six divisions had a Managing Director who reported to me. They set their own budgets which I accepted without question. Payment of bonuses to the MD and his team required them to achieve their budget. One dollar short, no bonus. But what about exceeding the budget? No increased bonus, just the amount he got for achieving the budget. The trick was that the amount of the bonus was a percentage of the budgeted result. The higher the budget, the more the bonus.

Cruel, really. Before the budget was presented, I slept like a baby, they didn’t sleep at all. The benefit to the business, and to me as CEO, was that Cerebos’ cash flow was predictable to within 3% from Day 1 of the year. The pressure from the team members to increase the budget – and thus their bonus – was intense. Pressure on MDs to achieve budget was total.

Reward is not about the moment, it is about the business. To get my business top valued, I needed not a switchback roller coaster but a steady, consistent profit record. These reward methods were designed to achieve just that, which is why the business was bought for 25 times earnings.

So much for reward, what about punishment?

Deterring the wrong type of behaviour

We train animals with the stick and the carrot. Human beings are animals but we aspire to – and have significantly achieved – standards of intellect and reasoning way beyond dogs. Treating a human the same way we treat a pet produces a distorted personality where reason and emotion get confused. For certain sorts of activity, like the punkah-wallah in India, where simple repetition demanding only slight intellectual grasp is needed, such training limits an individual’s potential even though it provides employment of a basic sort. For humans to flourish they have to learn to think beyond an auto-response, to use their superior brains.

An employer’s duty

As an employer, you may think that your first duty is to your company. I disagree. Employers’ first duty is to society. Without a well-functioning society, no individual can work to their best advantage, no business can grow to its maximum efficiency and no country can fulfil its duty to protect and nurture the planet and human species. Lofty aspirations? No, just survival.

An employer’s second duty is to the employee. Life is still a rhythm from birth to death. It may not be forever but it is now. That rhythm’s pace is changing in ways that cause confusion. Life is getting longer – a significant ten to fifteen years during my time. But people are growing up faster probably by some five to ten years over a century. Employers must not only help to accommodate these changes, they must actively support them. This requires much greater understanding of the process of change and its implications for work.

Proper planning

If this seems like a long preparation to discussing reward and punishment, it is intended to be. Our planning will need modifying as things happen but without it, we will never steer towards our goal. That is why the process of hiring and firing employees needs such careful attention (a topic I discussed a fortnight ago). Similarly reward and punishment must be thoughtfully planned.

Criminals need punishing. Not, I think, in the way we mostly do it but they need to feel some sort of pain for the pain they have inflicted. Pain is a subject we can cover here only superficially. When externally imposed, it has a poor record of correction and learning. When internally understood it is more effective. Even when punishment is justified, it should be a self-awareness of personal failure not a public execution to substitute for poor television.

Achieving self-awareness of damage caused

That self-awareness is best achieved by confrontation with the people damaged and the damage itself. I did this in Cerebos Pacific Ltd by calling a 10am meeting in the Boardroom with the person whose judgment had been at fault, those affected by it, and those who might have made the same poor decisions. I first opened a bottle of champagne and gave everyone a thimble full.

I explained that (whoever-it-was) had screwed up and we were here to sympathise – because we might have made the same mistake – to learn from them how to avoid it in the future and to discover how they were going to help to rectify the damage done. In this way the guilty confronted the victims but in an atmosphere of learning not of recrimination. It worked brilliantly.

What about dishonesty, fraud, theft? I took the view that criminal activity was for the police however mitigating the circumstances. Having called the police, I tried always to help the person involved, to plead good character, where true, or to offer practical assistance (money) post-punishment. I also employed ex-prisoners where possible to help them make a new start in life.

These ways of rewarding and punishing people may seem strange. They come from a personal understanding that many people have backgrounds deprived of what constitutes a good family. Most families fail in one way or another. As boss I attempted to fill the gaps where I saw them. I hoped to be as good a mentor and coach as I could be.

There is nothing as rewarding to a boss who does this as the progress his protégés make.

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