The case against executive bonuses
To be clear, we are not saying that performance-based bonuses are a bad thing. We do suggest that there is too little debate in the boardroom and it might just be a mistake to accept the “conventional wisdom” that prevails.
So what would the case be against paying bonuses? We break it down into a number of key areas.
There is little research to suggest that in aggregate bonus payments align with shareholder expectations. This is one of the biggest arguments used by proponents.
Getting the right formula in place is very difficult indeed. Measuring organisational performance through a finite number of key performance indicators, is a bit like trying to get the full story in a book whilst reading only every third paragraph. The science is inexact and it is very hard to screen out the impact of external factors, such as reduction in input costs, sudden change in market conditions and so on.
Boards and executives spend a lot of time on this. This time could be more fruitfully spent “making the boat go faster”.
Behaviour is skewed. Of course the intention behind any performance bonus scheme is to do exactly that. The challenge is when the year end is near, the chief executive, for example, can choose to “game” the system by focusing his or her efforts on actions that will deliver a bonus at the year end, more than actions that actually benefit the long-term health of the organisation.
At a societal level large bonuses are inherently divisive. Philosophically, organisations treat executives quite different to front-line staff. Front-line staff typically do not receive significant bonuses, if at all. The philosophy around senior leaders is that the organisation must pay them bonuses, or at least have a performance bonus structure in place, in order to extract the best performance. It is increasingly difficult for a multi-million dollar chief executive to truly “connect” with front-line staff, or authentically negotiate with unions over pay rates for the lowest paid workers, when in one day, they’re earning more than their front-line staff might in three months.
Even those firmly in the “against” camp would agree that the “genie is out of the bottle”. There is very little likelihood of organisations changing their minds completely about the merits of a performance-based pay system. However the debate is nonetheless worth having.