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Key Performance Indicators: Developing, Implementing, and Using Winning KPIs, 3rd Edition by David Parmenter

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Appendix AFoundation Stones of Performance-Related Pay Schemes

This appendix is adapted from David Parmenter, The Leading-Edge Manager's Guide to Success: Strategies and Better Practices (Hoboken, NJ: John Wiley & Sons, 2011).

Performance-related pay is broken both within the private sector and in government and nonprofit agencies. Jeremy Hope1 in this quote:

“…But despite hundreds of research studies over 50 years that tell us that extrinsic motivation (carrot and stick financial targets and incentives) doesn't work, most leaders remain convinced that financial incentives are the key to better performance.”

The Billion-Dollar Giveaway

Performance bonuses give away billions of dollars each year based on methodologies where little thought has been applied. Who are the performance bonus experts? What qualifications do they possess to work in this important area other than prior experience in creating the mayhem we currently have?

When one looks at their skill base one wonders how did they acquire gravitas in the first place? Which bright spark advised the hedge funds to pay a $1 billion bonus to one fund manager who created a paper gain that never eventuated into cash? These schemes were flawed from the start; “super” profits were being paid out, there was no allowance made for the cost of capital, and the bonus scheme was only “high side” focused.

The Foundation Stones

There are a number of foundation stones that need to be laid down and never undermined when building ...

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