In the last few weeks, I’ve read several articles on why the bonus culture has failed. Most of the articles centered on the two areas where I believe this failure is most prominent – banking and financial institutions and the corner office.
The articles served to highlight for me three ways in which the bonuses are simply “too much.”
1) Too much weight given to bonus vs. base pay
The word “bonus” has lost all meaning when people expect to receive them as part of their base compensation (a topic I’ve written about here before).
From the UK paper, The Guardian:
Banks say bonus pools have shrunk and payouts are being capped, but outside the glitzy world of investment banking, those used to drawing just an annual salary are increasingly baffled by a system of hefty incentivisation on top of already high pay. …
For Labour leader Ed Miliband, the bonus culture has been "corrosive" for Britain's economy and its society. He argues the meaning of the term "bonus" has been lost along the years.
"Exceptional rewards for exceptional performance means million-pound bonuses should not be handed out to people for just doing their job," he said in a speech on Friday.
In fact, he concluded, the system had failed. "It has enriched individual bankers, but weakened the banking sector as a whole by encouraging a form of risk which crossed the line into sheer recklessness," said Miliband. "For all the reform of the way bonuses are paid, they remain on a scale beyond the imagination of the vast majority of the population."
2) Too much of a gap between the total compensation for those at the top vs. those in the trenches
From a CEO compensation perspective in the US, Ed Frauenheim, editor-in-chief of Workforce Management magazine, suggests the “Business Buffett Rule”:
“For a company paying the federal minimum wage of $7.25 an hour (about $15,000 a year for a full-time worker), what if the total compensation for the CEO was capped at 100 times that? That means a CEO's annual income would be about $1.5 million. As pay goes, that's not peanuts. But it also is a far cry from packages that have ballooned for many execs into the tens and hundreds of millions of dollars.”
Frauenheim goes on to outline the benefits of such an approach, including boosting employee morale, better leader selection, and a long-term executive mindset instead of “working to the quarter.”
3) Too much complexity that only encourages negative repercussions
Back across the pond, the UK Sunday Times also addressed ideas for more appropriate CEO compensation featured ideas from Bruno Frey, a professor of behavioural science at Warwick Business School:
He wants companies to drop pay-for-performance schemes and their complicated criteria. Instead, at the end of each year boards should make a simple judgment on whether a bonus is deserved.
“Most businesses think people will work better if they are offered a bonus, which is why they create a direct link between wages and performance,” said Frey. “But often this is not the case at all, and sometimes the link can actually have negative consequences.”
At its worst it can mean that people take company-threatening risks to meet the criteria for a bonus. It also means that executives may focus too much on doing what is needed to meet their performance criteria at the expense of other tasks — even if these are more important.
Do you think bonuses have become “too much?” What alternative do you see as generating a more appropriate reward and recognition for work well done – at all levels of the organization?
As Globoforce’s Head of Strategic Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. His articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.