Simplifying employee incentives the Warren Buffet way

Wednesday 24th October 2018

Warren Buffet is most people’s idea of the ideal businessman. In an age when the super-rich are often seen as amoral, dishonest and completely unaffected by the economic problems of recent years, the Berkshire Hathaway boss is perceived rather differently.

Apart from having a reputation for a strong social conscience – he once said he should pay more tax because he’s a billionaire – he is also seen as a wise investor, the antithesis of the kind of people whose mistakes caused the financial crisis of a decade ago.

For that reason, many people will be keen to hear what he has to say about all manner of business issues, and he took the time to set out some words of wisdom for CNBC on these.

Keeping it simple
Among Mr Buffet’s nine essential rules for running a business is the advice to “keep employee benefits simple”.

This is certainly an important area. Benefits over and above salary are crucial to recruitment, retention and motivation in many a business, so it makes sense to ensure staff have something tangible on offer.

However, Mr Buffet criticised some of the ways employers try to achieve this, such as share options. Calling these “lottery ticket” arrangements, he noted the amount of reward people get can vary enormously and is “totally out of the control of the person whose behaviour we would like to affect”. It’s certainly not something he would do at Berkshire Hathaway.

Of course, there may be tax benefits to a company of rewarding staff this way, but Mr Buffet said a workable scheme should be “directly related to the daily activities of plan participants” and in line with the “economics of the business.”

This does, however, leave open a range of ways in which staff incentives can be rewarded in line with the businessman’s dictum.

The pros and cons of profit share schemes
For example, a profit share bonus scheme is one very obvious way of turning improvements in productivity and the attainment of success into something that directly feeds into staff rewards. Quite simply, if people’s hard work means they bring home the bacon, they will get a slice of it.

However, a profit share may not always work for every firm. In some businesses there may be a very clear distinction in responsibilities, with some people, for example, working in sales and others in administrative capacities.

This means that a rise in profit might be very clearly attributed to an improvement in the work of the sales department, but not the back-office staff. This could generate some resentment, as some may feel they have done more to bring in the profit than others but are not getting any extra reward.

Alternative ways to measure and reward performance
An alternative, therefore, would be to tailor reward schemes to the performance of each individual.

For instance, while some people’s actions might have a clear and obvious link to the bottom line and others not, the best way to deal with the latter category of employee could be to find some other metric by which to judge performance by.

Whether this includes the efficiency with which administrative tasks are carried out, measurable improvements in the quality of work or the completion of a piece of in-work training, there could be various possible ways of assessing work and recording staff accordingly.

Ultimately, as long as these are kept simple and linked clearly to performance, they should help motivate staff to work harder and smarter and leave them feeling rewarded at the end of the day, with the company as a whole benefitting as a result.


Image courtesy of iStock



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