The Problem When Managers Get Too Fond of Discretionary Rewards

Leaders often have a great fondness for discretionary rewards, particularly in bonus and incentive plans.

And why not? Discretionary rewards keep all the power and control with them. Wild card in hand, they are free until the moment the reward decision is made to do whatever feels right, based on their personal judgment call.

Too much control in management’s hands?

But discretionary rewards have their pros and cons, and the flip side of putting all the power and control in the manager’s hand is that none of it is left with the employee. In an age where employers are increasingly seeking (and needing) an enabled and engaged workforce, this is an act of disempowerment.

In his book Motivating and Rewarding Employees, author Alexander Hiam uses a simple story to illustrate this problem.

Imagine you are coaching a very strange basketball team. It plays in a league where there are no scoreboards, and nobody is allowed to tell players what the score is. Instead, the officials keep a private tally and announce the winner at the end.

If that were the case, how would the players know whether they were doing well or poorly? They’d have to check with their coach. That’s you. And, of course, you would try to keep a mental tally of the score so you’d know how the game was going, but since you couldn’t tell them the score, you’d have to tell them what to do based on your knowledge of the score. So players would look at you to see what your mood was and get cues from you about how hard to play.”

As Hiam notes, it’s really a stupid example because nobody would be willing to play under those conditions. Yet when organizations create bonus plans (particularly when they put increasing amounts of total employee cash at risk with these plans) and make award decisions completely subject to management discretion, isn’t that what they’re doing?

Managerial discretion can lead to confusion

Jerry McAdams, consultant and author of a number of books including The Reward Plan Advantage, refers to these plans as variable entitlements — highly valued, generally misunderstood, reinforcing to those who get them and resented by those who don’t.

As Jerry tells us:

The most insidious thing about discretion is the message it sends. If your manager controls your bonus, you are going to serve and delight her (if you’ve got half a brain). So, who is the customer? The manager. The needs of the real customer are clearly secondary to those of the manager. The more management discretion there is in the distribution of variable entitlements (or rewards of any kind), the more confusion there is in the minds of employees as to where their allegiance lies.”

Is there a place for discretion in rewards?

Absolutely. But it should be thoughtfully considered and crafted, explicitly communicated and it might be best reserved to address the exceptions — the circumstances which are unmistakenly beyond the control and abilities of program participants.

Total discretion = disempowerment

Total discretion in rewards suggests that everything is out of their control and ability — a message of complete disempowerment.

Is that the way your reward dollars should be spent?

This was originally published at the Compensation Café blog, where you can find a daily dose of caffeinated conversation on everything compensation.