Company bonuses are often the best way to incentivise people to do the best they can to achieve a company goal. The goals can be anything, although they are often financially related and purely number driven; the goals themselves do not hold any ‘moral’ value.
Bonuses, in today’s world, do not take into account any interest other than that of the organisation either. As a consequence, they can be used to reward behaviour that is not necessarily in the best interest of all.
The situation today
We live in a world where we expect a reward if we achieve a goal in business. This reward feeds our self-esteem, helps us to build financial security and enables us to experience or buy new things that give us a richer life.
As long as bonuses are linked to merit and achievement, we have few objections. Sometimes though, bonuses feel unjust, mainly if they are excessive towards the people receiving them.
Today, there is a clash of perspectives regarding the bonuses given in the financial sector. Bonuses of financial executives are still considered by many to be disproportionate. Privately owned banks were saved from bankruptcy with public funds and paying executives substantial amounts of bonuses, seems unjust.
However, when looking at the perspective of the executives, their bonus seems to be warranted; they reached goals that protect or grow the shareholder value, using the financial system we collectively created.
So what can we do?
We can resolve this seemingly diametrical opposition, but it requires a leap in perspective with those working in the financial sector. If we understand that the financial system is not a goal in itself, but just a means to procure a high-quality life all people, including themselves, then the insatiable hunger for bonuses may be halted.
Unfortunately, changing perspectives of people takes a long time. Radical systemic events like wars and financial crashes or personal events like the death of a loved one can be catalysts. Without them though, we need intermediate solutions.
Are New Key Performance Indicators A Solution?
As long as we require a monetary incentive to perform to the best of our abilities, bonuses seem to be the way forward. As you’ll read later though, bonuses have very limited impact, suggesting that we could get rid of them and not much would change. However, for now, let us assume that we do keep purely financial bonus structures.
The question arises about how we can align them according to behaviour that takes into account the interests of all parties involved.
In theory, the answer is simple: companies can transcend their own financial shareholder value and weigh in all interests in their bonus schemes.
We can explore an example to see how this could be put into practice.
Suppose a company is profitable but it wants to restructure its organisation. As they close down a profitable entity of their company, they decide to lay off 500 people. Most of us would feel bonuses out of place in this situation. However, company boards and shareholders do use these kinds of criteria to reward their management team.
Zooming in on the different stakeholders impacted, it is clear that the shareholders are the main beneficiaries. On the other hand, the company employees on the other hand are those who are directly negatively impacted; they lose their jobs and financial security because of profit maximisation purposes.
Indirectly, society as a whole is also negatively impacted; social benefit costs increase when people are laid off.
In the case described above, we have one stakeholder (the shareholders) that profits and two stakeholders (the employees and society) who experience negative impact. A variety of bonus mechanisms can be applied, depending on the extent to which one is willing to focus on the kind of value that is created.
If an organisation focuses on the private value instead of the societal value, only a percentage of the original bonus can paid.
As we have only have one out of every three stakeholders benefiting from the action, an organisation can choose to pay only 33% of the total bonus.
The other point of view emphasises the societal value over the private value: if there is one stakeholder that is not benefiting from a company measure, no bonus is paid at all.
Something to think about: do bonuses work at all?
In his book “The surprising thruth about what motivates us”, social scientist Dan Pink shows that bonuses only make sense if people have to execute repetitive and mainly uncreative tasks.
In other types of activities, the fact that people can apply their talents and work creatively and independently is much more motivating. Bonuses in this scenario only give a quick motivational fix.
Both from a motivational and a financial point of view, this is sub-optimal. Yet, in today’s business culture, bonuses are widespread amongst top executives.
So, the questions that company owners, managers and policy makers need to ask are, “Why do we need bonuses?” and “Do we believe top talent will not be willing to work for a generous salary provided they believe in the organisation’s mission where they can grow their skills?”
Shareholders can appoint executives who are intrinsically motivated by what an organisation does rather than the potential size of their bonus.
Do you know what the irony is?
What about you? What intrinsically motivates you?
Do you know the answer to that question? If you don’t know what motivates you, you can use our Happonomy Value Canvas freely to find out.
Go check it out! And yes, it is free.