Open-Ended Incentives Beat Capped Payouts

“paid off, he said to me, "Roy, don't ever buy another company on an incentive basis and put a top dollar limit on the price." I said, "Why not, Tim?" He said, "I never took any chances in building up a bigger business for you. I just played it safe, to be sure to get my three million dollars. As a result, that division is not nearly as big and as important as it could have been. I had no incentive to work hard after we had our three million dollars in the bag. If Textron's contingent payout had been open-ended for ten years, Dalmo Victor would have been a far more profitable division."”

“So we adopted a basic plan that involved incentive being tied to the return that the company earned on the divisional net worth. Our plan required that there would be no bonus unless the man- agement made at least 10 percent pretax on the divisional net worth and that the maximum bonuses could be reached if an un- usually high rate of return was made. Under the maximum bonus, the divisional president could earn ioo percent of his base salary, the second group could earn 75 percent; the third group 50 per- cent; and the next group 25 percent. It was our feeling that these plans should go far enough down in the organization so that every- one who had an opportunity to make or lose money for the com- pany as a result of their decisions should be included.”