A growing number of management
and reward practitioners have recently unrelentingly expressed their concern over
the effectiveness of financial bonuses, insofar as strongly recommending
employers to review their reward practices so as to completely efface these
from their total reward systems. Bonuses are depicted as the evil of reward and
their maintenance and new introduction into reward systems as a drama of Shakespearean
proportions.
The global financial crisis arisen
in 2008-2009 accounted for bonuses attracting the media and public interest, and
consequently widespread criticism, in that suspected of having actually played
an active role in triggering the global financial crisis. Bonuses received thus
a very bad press, severely tarnishing their reputation, which has ever since been
virtually impossible to restore.
The quality and effectiveness of
everything, notwithstanding, depends upon the use individuals made of what is
available to them. Medicines, for instance, are developed to heal people but
their excessive or wrong use can ultimately cause lethal consequences to
individuals. It is in general hardly believable that things may produce just
one type of outcome: good or bad. Every item and service is developed to attain
a specific objective and serve a specific cause, but their practical success and
effectiveness essentially depends on their use. Change management, corporate
culture, reward practices and every other policy and practice introduced by
employers into their organizations aim at producing a specific effect; which is
not in reality invariably attained. Whether the introduction of new practices
ends in a dismal failure this is habitually due to their inappropriate use or
execution. Bonus schemes make no exception, they are introduced by employers to
reward the contribution made by their employees to organizational success;
whether managers misuse them, nonetheless, employers not only seriously risk
not obtaining the intended results but, what is worse, producing
counterproductive, undesirable effects.
It is not sheer coincidence that
bonuses dire troubles come from the banking and financial sector, where the
implementation of a combination of very poor reward practices and weak risk control
systems has for years essentially prevailed. The problem was not indeed represented
by bonuses of their own, but rather by the mechanism bonus schemes were
operated. Bankers received their bonuses before the result obtained by their transactions
was known, cash bonuses, rather than afterwards, deferred bonuses. The significance
of bonuses was embedded in literally any financial sector company’s corporate
culture (bonus culture) and bonuses shortly become the only means used by the
employers of this sector to attract and retain talented professionals.
The banking sector does not
indeed represents the only case of bonus schemes misuse. Some multinational
companies have in fact worked hard to add insult to injury, implementing
practices essentially rewarding their CEOs and Directors for failure, offering
them staggering amount of money, in the form of lump sums, despite the
disastrous effects their management activity has produced.
In all of these cases the real problem
was never represented by the type of programme introduced by employers, but
rather by the method this was executed and by the lack of effective control
systems. Notwithstanding, many reward practitioners started to vigorously
demonize bonuses and tried to come up with new innovative ideas about how to replace
them; more often than not, confusing performance management with
performance-related pay practices. Innovative performance management processes
definitely help managers to establish a closer link with their direct reports
so as to impact and improve their performance and fasten and ease their professional
growth and development, but left open the problem of how to reward employees outperforming
their colleagues.
It is completely understandable that
reward and HR practitioners may feel the urge to develop new approaches and
methods for employers to reward their employees’ commendable efforts and
behaviour, provided that these new approaches are then properly used by managers
and not prove to be nothing else than the reinvention of the wheel.
Reward practitioners keen
interest in the development of new approaches may also be justified by the
pressure put on them by employers, which increasingly aim at recognizing
employee contribution without necessarily, exclusively resorting to cash
supplements. Gaining and maintaining competitive edge has traditionally proved
to be a genuine feat for employers, cost containment has been thus invariably
regarded by these as an effective approach enabling them to stay afloat in
their market also during gloomy economic periods and when the business is not
performing sufficiently well.
New solutions and approaches to
replace bonus schemes are of course welcomed by employers; reward practitioners
should, nonetheless, carefully analyse those emerged from “best practice” so as
to eventually further develop and adapt these to their specific business circumstances
and assure that the “best fit” approach is relentlessly adopted within their
organizations. Yet, reward managers and specialists should invariably ensure
that new methodologies, once introduced, are constantly reviewed and properly
executed by the organization management so as to enable employers to attain
their intended objectives.
The decision whether to remove
from, maintain in or introduce into an organization’s total reward system bonus
schemes should be made on the basis of the message the employer ultimately aims
at conveying by means of these pay arrangements, and should be consistent with
the organization’s culture and reward philosophy.
As mentioned earlier, performance
management practices enable managers to work closely with their reports,
provide them constant and honest feedback, coach them, and discuss and agree with
them training needs, development and career prospects, but do not help
employers to provide employees a tangible reward for their efforts and
outstanding contribution to organizational success. It is hardly believable
that a banker who has successfully concluded a transaction for a large amount
of money might find genuine fulfilment and satisfaction in sincere feedback and
training opportunities. A radical change of culture would clearly be necessary
within all of the organizations of the financial and banking sector, but there
is no certainty, lawmakers’ action notwithstanding, that this change of culture
will be even endeavoured by all of the employers. Post-Brexit, for instance,
the UK banks will no more be subject to the EU legislation and might thus bring
pressure to bear on the UK Financial Service Authority (FSA) to ease the rules
contained in the FSA Remuneration Code, developed also taking heed of the EU
relevant Directives, so as to enable them to attract and retain talented
bankers and financial professionals from across the European territory
(especially in response to the statements released by many international banks,
which have unveiled plans to move their HQs from the City to other European
financial centres, by reason of the Brexit).
Taking it as axiomatic that bonus
schemes have to be, first and foremost, correctly and properly managed and
executed, these can be regarded as a good fit for an organization whether their
introduction or maintenance is consistent with the business culture and truly enables
the employer to pursue its intended strategy. Whether, for instance, an
organization reward philosophy aims at fostering high levels of productivity
and performance, it is highly likely that a properly managed and executed bonus
scheme would effectually support the employer in the attainment of the desired
results.
Bankers, CEOs and executives
directors do not indeed represent the only cases bonus schemes are misused.
These pay arrangements besmirched reputation is in fact also severely affected
by the wanton fashion these are habitually executed by managers, who do not consider
bonuses as a means to an end, but rather as an administrative burden. To avert difficult
situations and conversations with their reports, a large number of managers use
bonuses also to reward employees whose level of performance is everything but
commendable and worthwhile. This is clearly by no means the reason why
employers introduce these pay arrangements into their organizations and is not
the message employers are expected these programmes to convey either.
In spite of their unsavoury
reputation, whether consistent with business culture and properly executed, bonus
programmes can indeed effectually help employers pursue their intended strategy.
Employers aiming at introducing this type of scheme should never forget and
neglect that bonus programmes are a form of performance-related pay, as such
they should hence be implemented in those cases in which performance and
results can be assessed and evaluated. This does not entail that performance
should be necessarily quantitatively measured; the attainment of a particular
outcome, the successful and active contribution to a project, the introduction
of innovative processes, practices and approaches to work can be all definitely
regarded as assessable tasks.
Rather than recommending
employers to remove from their reward systems bonus schemes, reward practitioners
should help managers to come up with new, appropriate ways to agree with their
reports objectives and targets enabling them to easily or relatively easily assess
their direct reports’ performance and contribution to organizational success,
and encourage innovation. Whether managers are offered the right solutions to
appraise individual performance, they will gain the confidence necessary to
properly and effectively manage and operate these programmes.
The real compelling reason for
employers introducing bonus schemes is establishing a clear line of sight
between pay and performance, that is, between effective contribution to
organizational success and the contributor’s financial reward package. Albeit
of financial nature, the lump sums paid by employers to meritorious,
praiseworthy employees also represent a form of recognition, a way of saying
thank you to employees and let them understand that their effort and commitment
do not go unnoticed. The adoption of this approach essentially enables
employers to foster meritocracy in the workplace; this objective,
notwithstanding, can be practically achieved only whether the implementation of
these schemes is underpinned by equity tenets as opposed to equality principles.
Employers may aim at introducing
different types of programmes to express their gratitude and appreciation to
their meritorious employees but they should invariably ensure that the message
these get across is crystal clear and consistent with the business culture, and
reward strategy and philosophy.
Bonuses do not indeed represent
the dark side of reward, provided that these are consistent with organizational
culture, are properly executed and are introduced under the right
circumstances. Reward practitioners should relentlessly strive to come up with
genuine innovative ideas so as to support their organizations in adopting the
correct approach to reward and introducing the most suitable pay arrangements,
safe in the knowledge that each solution identified must suit the real organizational
needs and circumstances.
Reward specialists should also
carefully take heed of the approach to reward the organization has decided to
adopt: performance-related, contribution-related or competency-related pay, and
ensure that the scheme they plan to introduce is consistent with this. Reward
practitioners should also scrupulously consider whether the introduction of the
new approach requires a cultural change and eventually implement the required change
project prior to the introduction of the new scheme.
