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Dear Workforce What Are Your Thoughts About Bonuses

A Dear Bean-Counting:

Bonuses and other incentive compensation can be powerful motivators for frontline sales representatives and CEOs alike. Most sales reps’ earnings are derived largely through commissions or bonuses from products and transactions. Similarly, many boards of directors tie CEO compensation directly to stock price performance, through either options or cash bonuses.

While companies use incentive compensation to reward their front line and their CEO, they often run into difficulty when using variable compensation across what we’ll call “the middle”–or the rest of the workforce. The basis for bonuses across the middle is either too far removed from the employee or too subjective.

Take the case of broad-based employee stock-option plans or other rewards based on overall company performance. In large organizations, few employees can have a significant positive impact on their company’s share price. Most employees are too far removed from the complex set of decisions and actions made by senior leaders. As a result, stock-option plans frequently fail to reward for performance or provide sustained motivation.

Some companies base bonuses on goals that are more directly controllable by employees across the middle. For example, R&D managers are rewarded for the number of projects on time and on budget. Keep in mind, though, that the success of most employees across the middle depends heavily on the contribution and collaboration of others in the organization. Therefore, goals and achievements quickly become subjective. Bonuses lose their ability to motivate employees to higher levels of performance.

Our research shows that many successful managers rely on emotional factors such as pride–rather than money–to motivate employees across the middle. These managers focus on controllable goals and build pride in anticipation of success–something no manager could do with bonuses.

SOURCE: August Vlak, a principal at Katzenbach Partners LLC, New York, NY, June 17, 2003.

LEARN MORE: Please readIncentives and the Art of Changing Behavior.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from federal law.

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