…whether 'tis nobler in the mind to suffer the slings and arrows of outrageous fortune or to take arms against a sea of bonuses and by opposing end them…
When bonuses were first introduced, they lived up to their Latin origin and rewarded good performance. In the last 30 years however, CEOs of several FTSE companies have seen their salary rise by a staggering 4000% and bonuses are now often seen as guaranteed rather than something to be earned. This fact, accompanied by the banking crisis, and numerous ‘city scandals’ means that the bonus system has, once again, come under the microscope. But, as usual there are two sides of the coin…
Some say that bonuses are contributing to the corrosive culture sweeping the business world, and that they enhance the gap between the richest and poorest in society. They argue that bonuses are complicated; they cost too much and are cruelly divisive. If they are unbalanced or disproportionate they can inadvertently reward the wrong type of behaviour, whereby individualism is encouraged at the expense of the team and employees stab each other in the back or step on each other’s toes to get to the top. Bonuses, when left unchecked, can also reward the slackers and so build up anger, resentment in a demotivated workforce. If set up by a biased management team, and if not equitably distributed, they can ignore some of the key hard workers as they are used to reward themselves and their ‘mates’.
Two prominent UK asset managers have decided to rethink the way they reward their employees. Neil Woodford, one of Britain’s best known investors, has eliminated bonuses for the 35 employees at Woodford Investment Management. He has said that bonuses distort behaviour and encourage employees to think in the short term and become reckless. In addition, Daniel Godfrey, former chief executive of the Investment Association, the trade body for UK fund managers, is setting up an investment trust that will not pay bonuses to executives, in an effort to reduce short-termism.
On the other hand, bonuses can be used incredibly effectively in a firm to motivate, reward loyalty and thank staff. At one extreme, there are corporate structures like the John Lewis Partnership where it is the staff who own the company and who actually take a share in the profits. This scheme undoubtedly boosts recruitment and retention and increases morale. However, even when firms don’t go to these lengths, many employers believe that standard, modest, bonus schemes, when equitably applied across the board, can increase productivity and motivation, recognise personal and team contributions made against specific objectives and performance management criteria and ultimately boost staff satisfaction and customer service levels. Used in the right way, bonuses should incentivize, recognize and reward effort-both individual and combined-and encourage positive change from within.
Bonuses don’t have to be millions of pounds. The most motivational rewards can often be small cash bonuses or extra paid holiday. Employees often look for new employment opportunities when they feel they are under-compensated or unappreciated. Bonuses are a way of reducing staff turnover, rewarding employees (at all levels and in all teams) and showing them that they are appreciated. They can also be used to strengthen team bonds. When employees work together on team bonus goals, they establish a sense of camaraderie, as they pull together for the common good.
Surely then it is time to challenge the status quo and puncture the bonus bubble of the systems that are outdated and unfair. Where these systems do little to incentivize positive results - and where - in some cases - they actually have a detrimental effect on other team members or the firms’ output, it’s definitely time to rethink.
How does your bonus system work? Is it fair? Is it accessible to all? Is it set up to reward exactly the right behaviour? If the answer to any of these questions is no, then change it!
Woodford Investment Management, a firm with £14 billion assets under management, is scrapping employee bonuses in favour of salary rises. Bonuses encourage "short-term decision making and wrong behaviours," Craig Newman, chief executive and co-founder of the company, said according to a report in The Guardian. The firm, set up in 2014 by star-stock picker Neil Woodford, has 35 staff. "While bonuses are an established feature of the financial sector, Neil and I wanted to take the opportunity to do something different that supports the firm's culture and ethos of challenging the status quo," "There is little correlation between bonus and performance and this is backed by widespread academic evidence. Many studies conclude that bonuses don't work as a motivator, as expectation is already built in. Behavioural studies also suggest that bonuses can lead to short-term decision making and wrong behaviours,"