Hot topic: Paying bonuses
Peter Cheese and Craig Newman, October 06, 2016
Perhaps some insight from the world of Contract Theory can help with the structuring of bonuses and wider reward packages http://bit.ly/2evFcQE
Read More Adam Gibson
October 14, 2016 11:53
Some firms have stopped paying their staff bonuses. Do bonuses encourage short-term thinking?
What should businesses do to evaluate the effectiveness of their reward structures? And do we need an overall simplification of executive pay to curb excessive wage packets?
Peter Cheese, chief executive of the CIPD, says:
"Bonuses are being challenged from a number of perspectives. Too many bonus systems are geared to shorter-term financial results, which does not always incentivise the right behaviours in driving longer-term sustainability, values and culture.
"In some cases they have encouraged entirely the wrong behaviours. And critically, there is mixed evidence that bonus payments actually do improve performance.
"Bonus culture has become increasingly widespread as part of reward systems for all kinds of jobs and roles, and particularly at senior levels has been part of the growth of excessive executive pay, which if not corrected will result in further policy intervention.
"We need to go back to the fundamentals, starting with how we evaluate performance beyond just delivery of numbers, how we assess performance, making it clear and simple, how we recognise and encourage good performance beyond just paying more, and how we create fairer payment systems.
"Collective bonus approaches can be part of this, but the time has come to question the norm of individual bonuses."
Craig Newman, chief executive of Woodford Investment Management, says:
"We have implemented a remuneration scheme that is fair and appropriate for Woodford employees and, ultimately, clients. Drawing on our experience of various bonus-led remuneration models, we concluded that bonuses are largely ineffective in influencing the right behaviours.
"There is little correlation between bonus and performance and this is backed by widespread academic evidence. Many studies conclude that bonuses don’t work as a motivator because expectation is already built in. This can lead to short-term decision-making and wrong behaviours.
"Our move [to stop paying bonuses altogether] is about pay structure, not pay levels. Consequently, this is less about the level of executive pay and more about an alignment of executive rewards with shareholder returns, which is key for us. That is why as long-term investors in companies we seek a healthy level of engagement."
Check back tomorrow for part two of this Hot Topic with the High Pay Centre's Stefan Stern and Chris Philp, MP for Croydon South