Bonus payment

Bonus payments in the UK in 2013.

A bonus payment is usually made to employees in addition to their base salary as part of their wages or salary. While the base salary usually is a fixed amount per month, bonus payments more often than not vary depending on known criteria, such as the annual turnover, or the net number of additional customers acquired, or the current value of the stock of a public company. Thus bonus payments can act as incentives for managers attracting their attention and their personal interest towards what is seen as gainful for their companies' economic success.

There are widely‐used elements of pay for performance and working well in many instances, including when a fair share of an employees participation in the success of a company is desired. There are, however, problematic instances, most notably when bonus payments are high. When they are tied to possibly short-lived figures such as an increase in monthly turnover, or cash flow generated from an isolated marketing action, such figures often do not reflect a solid reliable win for a company, and they certainly do not reflect a manager's lasting efforts to the company's best. Australian retail entrepreneur Gerry Harvey, while supporting bonuses for long term company performance has said

that too many bonuses are focused on the short term. "[To say] 'just because you had a good year this year I'll give you a $5 million, $10 million bonus', I think that's stupid,"[1]

Bonuses are prone to being adjusted or even manipulated to the benefit of those employees who are responsible for reporting them, while they are already planning their leave with a golden handshake. Setting up good employment contracts may be a means to avoid that – at least to some extent – but this is rare in reality.

Effectiveness questioned

In 2016 the management of Woodford Investment Management ended discretionary bonuses. The decision was made because they concluded that the bonuses were “largely ineffective in influencing the right behaviors,” and that “there is little correlation between bonus and performance and this is backed by widespread academic evidence”.[2]

Also in 2016, the Australian Council of Superannuation Investors "conducted a study of executive pay and concluded bonuses may have become fixed pay, dressed up." They found that despite decreased Australian company earnings in 2015, "93 bosses of the top 100 companies got a bonus, with the median being $1.2 million, the highest since 2007, just before the GFC."[1]

Malus

The inverse of a bonus payment, that is when base salaries shrink on poor performance, this is called a malus.

References

  1. 1 2 Robertson, Andrew (14 September 2016). "Executive bonuses: British fund manager Woodford axes 'largely ineffective' payouts". ABC News online. Australian Broadcasting Corporation. Retrieved 14 September 2016. Executive are not outsiders. They tend to be insiders. They tend to be well socially networked with those who also hold company boards, company board directorships
  2. ↑ Jones, Sarah (August 22, 2016). "Investment Firm Scraps Bonuses for Single Salary". Bloomberg. Bloomberg L.P. Retrieved 14 September 2016.
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