Sunday, 29 January 2017

Can Be Bonuses Really Regarded As The Dark Side of Reward?

A growing number of management and reward practitioners have recently unrelentingly expressed their concern over the effectiveness of financial bonuses, insofar as strongly recommending employers to review their reward practices so as to completely efface these from their total reward systems. Bonuses are depicted as the evil of reward and their maintenance and new introduction into reward systems as a drama of Shakespearean proportions.

The global financial crisis arisen in 2008-2009 accounted for bonuses attracting the media and public interest, and consequently widespread criticism, in that suspected of having actually played an active role in triggering the global financial crisis. Bonuses received thus a very bad press, severely tarnishing their reputation, which has ever since been virtually impossible to restore.

The quality and effectiveness of everything, notwithstanding, depends upon the use individuals made of what is available to them. Medicines, for instance, are developed to heal people but their excessive or wrong use can ultimately cause lethal consequences to individuals. It is in general hardly believable that things may produce just one type of outcome: good or bad. Every item and service is developed to attain a specific objective and serve a specific cause, but their practical success and effectiveness essentially depends on their use. Change management, corporate culture, reward practices and every other policy and practice introduced by employers into their organizations aim at producing a specific effect; which is not in reality invariably attained. Whether the introduction of new practices ends in a dismal failure this is habitually due to their inappropriate use or execution. Bonus schemes make no exception, they are introduced by employers to reward the contribution made by their employees to organizational success; whether managers misuse them, nonetheless, employers not only seriously risk not obtaining the intended results but, what is worse, producing counterproductive, undesirable effects.

It is not sheer coincidence that bonuses dire troubles come from the banking and financial sector, where the implementation of a combination of very poor reward practices and weak risk control systems has for years essentially prevailed. The problem was not indeed represented by bonuses of their own, but rather by the mechanism bonus schemes were operated. Bankers received their bonuses before the result obtained by their transactions was known, cash bonuses, rather than afterwards, deferred bonuses. The significance of bonuses was embedded in literally any financial sector company’s corporate culture (bonus culture) and bonuses shortly become the only means used by the employers of this sector to attract and retain talented professionals.

The banking sector does not indeed represents the only case of bonus schemes misuse. Some multinational companies have in fact worked hard to add insult to injury, implementing practices essentially rewarding their CEOs and Directors for failure, offering them staggering amount of money, in the form of lump sums, despite the disastrous effects their management activity has produced.

In all of these cases the real problem was never represented by the type of programme introduced by employers, but rather by the method this was executed and by the lack of effective control systems. Notwithstanding, many reward practitioners started to vigorously demonize bonuses and tried to come up with new innovative ideas about how to replace them; more often than not, confusing performance management with performance-related pay practices. Innovative performance management processes definitely help managers to establish a closer link with their direct reports so as to impact and improve their performance and fasten and ease their professional growth and development, but left open the problem of how to reward employees outperforming their colleagues.

It is completely understandable that reward and HR practitioners may feel the urge to develop new approaches and methods for employers to reward their employees’ commendable efforts and behaviour, provided that these new approaches are then properly used by managers and not prove to be nothing else than the reinvention of the wheel.

Reward practitioners keen interest in the development of new approaches may also be justified by the pressure put on them by employers, which increasingly aim at recognizing employee contribution without necessarily, exclusively resorting to cash supplements. Gaining and maintaining competitive edge has traditionally proved to be a genuine feat for employers, cost containment has been thus invariably regarded by these as an effective approach enabling them to stay afloat in their market also during gloomy economic periods and when the business is not performing sufficiently well.

New solutions and approaches to replace bonus schemes are of course welcomed by employers; reward practitioners should, nonetheless, carefully analyse those emerged from “best practice” so as to eventually further develop and adapt these to their specific business circumstances and assure that the “best fit” approach is relentlessly adopted within their organizations. Yet, reward managers and specialists should invariably ensure that new methodologies, once introduced, are constantly reviewed and properly executed by the organization management so as to enable employers to attain their intended objectives.

The decision whether to remove from, maintain in or introduce into an organization’s total reward system bonus schemes should be made on the basis of the message the employer ultimately aims at conveying by means of these pay arrangements, and should be consistent with the organization’s culture and reward philosophy.

As mentioned earlier, performance management practices enable managers to work closely with their reports, provide them constant and honest feedback, coach them, and discuss and agree with them training needs, development and career prospects, but do not help employers to provide employees a tangible reward for their efforts and outstanding contribution to organizational success. It is hardly believable that a banker who has successfully concluded a transaction for a large amount of money might find genuine fulfilment and satisfaction in sincere feedback and training opportunities. A radical change of culture would clearly be necessary within all of the organizations of the financial and banking sector, but there is no certainty, lawmakers’ action notwithstanding, that this change of culture will be even endeavoured by all of the employers. Post-Brexit, for instance, the UK banks will no more be subject to the EU legislation and might thus bring pressure to bear on the UK Financial Service Authority (FSA) to ease the rules contained in the FSA Remuneration Code, developed also taking heed of the EU relevant Directives, so as to enable them to attract and retain talented bankers and financial professionals from across the European territory (especially in response to the statements released by many international banks, which have unveiled plans to move their HQs from the City to other European financial centres, by reason of the Brexit).

Taking it as axiomatic that bonus schemes have to be, first and foremost, correctly and properly managed and executed, these can be regarded as a good fit for an organization whether their introduction or maintenance is consistent with the business culture and truly enables the employer to pursue its intended strategy. Whether, for instance, an organization reward philosophy aims at fostering high levels of productivity and performance, it is highly likely that a properly managed and executed bonus scheme would effectually support the employer in the attainment of the desired results.

Bankers, CEOs and executives directors do not indeed represent the only cases bonus schemes are misused. These pay arrangements besmirched reputation is in fact also severely affected by the wanton fashion these are habitually executed by managers, who do not consider bonuses as a means to an end, but rather as an administrative burden. To avert difficult situations and conversations with their reports, a large number of managers use bonuses also to reward employees whose level of performance is everything but commendable and worthwhile. This is clearly by no means the reason why employers introduce these pay arrangements into their organizations and is not the message employers are expected these programmes to convey either.

In spite of their unsavoury reputation, whether consistent with business culture and properly executed, bonus programmes can indeed effectually help employers pursue their intended strategy. Employers aiming at introducing this type of scheme should never forget and neglect that bonus programmes are a form of performance-related pay, as such they should hence be implemented in those cases in which performance and results can be assessed and evaluated. This does not entail that performance should be necessarily quantitatively measured; the attainment of a particular outcome, the successful and active contribution to a project, the introduction of innovative processes, practices and approaches to work can be all definitely regarded as assessable tasks.

Rather than recommending employers to remove from their reward systems bonus schemes, reward practitioners should help managers to come up with new, appropriate ways to agree with their reports objectives and targets enabling them to easily or relatively easily assess their direct reports’ performance and contribution to organizational success, and encourage innovation. Whether managers are offered the right solutions to appraise individual performance, they will gain the confidence necessary to properly and effectively manage and operate these programmes.

The real compelling reason for employers introducing bonus schemes is establishing a clear line of sight between pay and performance, that is, between effective contribution to organizational success and the contributor’s financial reward package. Albeit of financial nature, the lump sums paid by employers to meritorious, praiseworthy employees also represent a form of recognition, a way of saying thank you to employees and let them understand that their effort and commitment do not go unnoticed. The adoption of this approach essentially enables employers to foster meritocracy in the workplace; this objective, notwithstanding, can be practically achieved only whether the implementation of these schemes is underpinned by equity tenets as opposed to equality principles.

Employers may aim at introducing different types of programmes to express their gratitude and appreciation to their meritorious employees but they should invariably ensure that the message these get across is crystal clear and consistent with the business culture, and reward strategy and philosophy.

Bonuses do not indeed represent the dark side of reward, provided that these are consistent with organizational culture, are properly executed and are introduced under the right circumstances. Reward practitioners should relentlessly strive to come up with genuine innovative ideas so as to support their organizations in adopting the correct approach to reward and introducing the most suitable pay arrangements, safe in the knowledge that each solution identified must suit the real organizational needs and circumstances.

Reward specialists should also carefully take heed of the approach to reward the organization has decided to adopt: performance-related, contribution-related or competency-related pay, and ensure that the scheme they plan to introduce is consistent with this. Reward practitioners should also scrupulously consider whether the introduction of the new approach requires a cultural change and eventually implement the required change project prior to the introduction of the new scheme.

Longo, R., (2017), Can Be Bonuses Really Regarded As The Dark Side of Reward?; Milan: HR Professionals.