Bonuses. Don’t you just love them? Well not these days it seems. And now it is not just bankers who are in deep doo-doo because of their large payouts but anyone in the public sector who is under the microscope. Today the government has announced a review of all payments across the public sector and other organisations effectively publicly owned. The declared intention is to make sure people only get bonuses for exceptional performance. But is that really what we want?
Most performance-related pay systems try to reflect more than one level of worthwhile performance and if it is only a few outstanding performers who get the reward what is the incentive for the rest to try harder? Everybody lauds the John Lewis approach of sharing out surplus profit among the staff. That goes to everybody not just exceptional performers.
The term bonus is nowadays used far too broadly to cover all sorts of performance payments that are not within the basic monthly salary. It is worth reminding ourselves what such payments are intended to achieve. Basically, they have one or more of three purposes.
1) to provide, for individuals, a clear relationship between performance and reward. Sure, everyone should do their best in return for their basic pay but life isn’t quite like that. Even the best-intentioned employee will have their motivation undermined if they see their work-shy colleagues being equally rewarded.
2) to help focus individuals’ attention on those aspects of the job that are most important. This is obvious in sales commission type bonuses but, in a less formulaic way, should be part of all performance-linked schemes. That bonus the CE of RBS was forced to decline was actually based on assessments of progress against three or four key parameters.
3) to provide a cost-control mechanism that allows the employer to flex some of their employment costs to reflect achieved earnings. As in the John Lewis case it also reassures the staff that when things go well the bosses will not just take all the money home. This tends to be most prominent in industries, such as banking where, once base costs have been met, additional profit is largely cost free.
So don’t throw the baby of motivation out with the bathwater and watch out for the law of unintended consequences. In jobs and sectors where bonuses have been a regular, if varying, part of the package removing or reducing them may well end up increasing basic pay instead. Though I wonder if there would have been much less public vitriol, and political embarrassment, if instead of awarding Stephen Hestor a £1m bonus his salary had been fixed at a £1m higher in the first place.
