The Bonus Conundrum

How to be fair and open in rewarding executive excellence

(Originally posted on IRC Global Executive Search Partners blog)

Executive pay packages are under increasing shareholder – and public – scrutiny.

The original objective of the bonus system was to encourage excellent performance. However, as Rohan Carr (IRC Australia) pointed out in a recent blog: “bonuses are [increasingly] associated with motivating other than excellence – the reward itself has become the motivation.”

He adds that, “in the hunt for the best and brightest, many organizations have convinced themselves that high bonuses are necessary to attract the best talent, despite the fact that contemporary research does not necessarily support this view.”

  • The board at Dell Inc. approved a $91.1 million special bonus pool as retention bonuses for some of its executives, ‘as the computer maker tries to hold on to key personnel while it pursues a $24.4 billion buyout deal’, according to The Wall Street Journal.

Some corporations are choosing to add conditions to executives’ bonuses:

Wal-Mart has added a ‘compliance component’ to its executive bonus evaluations; ‘if the audit committee judges “adequate progress” hasn’t been made, cash incentive compensation will be reduced or eliminated’, a recent Bloomberg report.

Rohan Carr offers some basic ideas to improve the effectiveness of bonuses.
They include:

  • Limiting external factors
  • Ensuring bonuses are always discretionary
  • Associating bonuses with long-term collaborative behaviour and thinking – in line with the organization’s interests rather than short-term individualism.
  • Reflecting differences in skills and abilities in performance outcomes.
  • Using objective criteria to measure outcomes and performance, and a subjective system to measure how the outcomes were achieved.

And, as he concludes, the most important yet often unrecognized step is simply to make sure that ‘the bonus system is clear, transparent and understood by all.’

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