Why do employers pay bonuses?

Writing in defence of bonuses, Chris Dillow says:

There’s good evidence (pdf) that some forms (pdf) of profit-related pay can improve (pdf) productivity quite significantly.

True enough, but there is also evidence that many organisations don’t have a clue whether or not their own bonus schemes are having the effects they were designed to achieve..

According to the CIPD annual reward survey of 520 organisation, covering 1 million employees, 46% of employers have no idea how much they spend on pay and other forms of remuneration. Even among those that knew the size of their pay bill, most did not know what proportion was made up of base pay, bonuses and other benefits.

Only a third of the respondents were able to assess the impact of their reward practices on the things they were supposed to be encouraging.

This seems to indicate that most employers simply trust individual managers to make sure there is a link between what is being paid and the outcomes the organisation says it wants. That, in turn, depends on the skill and behaviour of the managers. In many organisations, therefore, the link between pay and performance is likely to be tenuous, to say the least.

There are a number of reasons why employers give bonuses, the most common being that everyone else in the sector is doing it. Managers also like bonuses because it gives them some sort of leverage over employees. That leverage is not necessarily related to specific defined goals. Often, it’s more like, “Get me a coffee when I ask for one and don’t piss me off, or I’ll screw you at bonus time.” Finance directors also like bonuses because they can easily be cut when things get tough.

Chris is right, there is some evidence that bonus payments can increase productivity. What most companies don’t have, though, is evidence that their own incentive schemes have any impact at all on the performance of their businesses.

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One Response to Why do employers pay bonuses?

  1. charliemcmenamin says:

    I’m no HR professional so I’m certainly not going to take issue with you. But I do note that you seem to say that bonus incentives can work but too many firms don’t know if they do, whilst Simon Caulkin says they can’t work, at least not generally, because they have to be simple and, if simple, end up being simplistic.
    http://www.guardian.co.uk/money/2009/feb/22/pay-bonus-financial-sector

    Actually, this strikes me as a very narrow band of disagreement. Both your conclusions would appear to point towards a much more sparing use of bonuses per se.

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