Bonus Systems as Tools for ‘Managing’ Managers – the Behavioural Effects of Performance-Based Financial Rewards

Abstract

In traditional reward systems, managers’ key performance indicators must surpass an agreed target in order to achieve a financial bonus. This system is designed to motivate high performance; yet adverse behavioural effects are often observed. These include middle managers becoming incentivised to game the reward system and target negotiation process they are subject to. This paper discusses three approaches to preventing such undesirable behavioural effects: Firstly, a linear pay-for-performance system without a target floor for receiving a performance bonus. Secondly, a bonus banking system where managers participate at the company’s losses as well as its gains. Thirdly, a proposal that uses the Beyond Budgeting approach which radically negates the core premises of the traditional reward system and replaces rewards for individual manager performance with those for wider team performance. These three approaches are compared and evaluated with respect to their potential to prevent unwanted manager behaviour, and on consideration of how effectively they may be operationalised.