Setting Bonus Targets with Hindsight

Procter & Gamble "retrospective" compensation system takes into account the market environment and unusual events during the year.

Want to create a culture that breeds higher achievers? According to Procter & Gamble CFO Clayton Daley, you might want to forget about setting performance targets for bonuses and, instead, decide what’s fair to pay after all the results are in.

The company has been using an unusual, retrospective compensation system for its bonus-eligible employees for many years. After “initial skepticism,” he says, most people at the company now think it’s a fair system. “There are always a few people who don’t like the number at the end of the year,” says Daley. “But as long as we can explain to them why we gave them what we did, I think it’s a system that works.”

The employees do know in advance the sales, earnings, and cash flow targets they must achieve “in broad terms,” Daley says. “This system is not some kind of black box.” But at the end of the year, “we look at the actual results in the context of the business environment, the competitive environment, how well their competitors did, and in the context of commodity or energy price increases or other one-time things that could have occurred.”

A key advantage of the approach, Daley says, is that it avoids the “culture of negotiation [on bonus targets] and trying to get the lowest target you can.”

While typically a few employees will challenge the number, he says, overall the program has been a success, and not just because it achieves better sales results. Daley says it removes the urge for what he calls “blame accounting.”

“It gets rid of all the negotiating and all the people wanting to do things with accounting, or to charge something to someone else, as a way to make their numbers look cosmetically better,” he says.

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