The importance of performance related bonuses
One of the best ways to motivate high-performing employees is through an adequate, robust and fair bonus plan. This entails relating performance predictions and measurement to retribution, and establishing appropriate targets. Not only do target bonuses enhance and reward employee performance, but also they become an essential component of management control systems, according to a 2014 study, conducted by Indjejikian, Matejka, Merchant and Van der Stede.
Target bonuses is a delicate subject as it implies finding a criteria upon which performance is appraised and converting it into the according incentive. Having considered task difficulty and hierarchical structures within a company, an extensive number of variables needs to be taken into account in establishing a bonus plan. However, an aspect that has to remain constant is the fact that once stated, the criteria for retribution needs to be respected and bonuses have to be distributed as statutory within the organization. Ignoring such aspects can prove to be detrimental to individual performance and the organization as a whole, as the effects of monetary incentives, especially expectations regarding a deserved bonus, prompt employees to invest more of their potential into a certain task. As proven in Kleinsorge and Rinkenauer’s 2012 study, one of the major negative effects to this is lower tolerance for not receiving due incentives and for inconsistencies in bonus plans.
When debating unfulfilled expectations regarding bonuses and the possible employee behavioral responses, the options span from mild detriments, which can come in the form of slight demotivation and disengagement, to image damaging law suits, as computing giant IBM found out in 2013.
In 2013, Fiona White, an IBM sales executive, has decided to sue the company, stating that the $534,000 bonus the company has provided her with is below the figure IBM owes her, according to the company’s bonus and incentives plan. Circa half a million USD below their agreed compensation scheme, and Ms. White’s expectations, the bonus did not reflect the achieved target. Having reached a $9,1 million revenue in sales, Ms. White has streamed far beyond the established $900,000 quota, which, by her estimate, should have placed her in the $ 1 million retribution range. The inconsistency between the stated incentives plan, retribution expectation and IBM’s offer have prompted Ms. White to sue, invoking a “breach of an incentive plan” – to quote barrister Anna Forsyth, Ms. White’s attorney.
This case is testimony to the importance of creating a fair incentives system, which allows target bonuses to be applied consistently, as stated and communicated to a company’s employees. The essential benefits relate to talent management, individual performance and, invariably, to the organization’s performance as a whole.
References:
- Indjejikian R.J., Matějka, M., Merchant, K. A. and Van der Stede, W. A. (2014), Earnings targets and annual bonus incentives. The Accounting Review In-Press
- The Sydney Morning Herald (2013), High-achieving employee sues IBM for bonus
- Kleinsorge, T. and Rinkenauer, G. (2012), Effects of monetary incentives on task switching, Experimental Psychology, 59(4): 216-226
- Flodgren, G., Eccles, M. P., Shepperd, S., Scott, A., Parmelli, E. and Beyer, F. R. (2011), An overview of reviews evaluating the effectiveness of financial incentives in changing healthcare professional behaviours and patient outcomes, Cochrane Database of Systematic Reviews, Issue 7
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Tags: IBM, Incentive Scheme, Talent management
