Bonus Plan Consequences
Employers are constantly looking for ways to attract qualified employees; bonus plans have been a driving force in the business world. The implementation of bonus plans is often used by employers in an effort to attract and keep qualified employees. In recent years the consequences of such plans has been carefully scrutinized. The purpose of this discussion is to examine some of the consequences that companies face when they make a decision to implement bonus plans. The discussion will also focus on steps that can be taken to avoid the negative consequences of bonus plans. The paper will begin by discussing what bonus plans are and why they are needed.
What are Bonus plans and why are they needed
Bonus plans are simply reward systems that are given to employees to encourage loyalty and ensure good performance. (Amsler et al. 2002) According to an article in the Journal of Managerial Issues, most bonus plans are based on merit -- meaning that the compensation that is received is based on an employee's performance. (Amsler et al. 2002) These plans are often used by employers to increase the productivity and morale of their employees. Another article in Many U.S. business owners are finding that turning to incentive programs - in which pay is linked to performance - is a good way to spur sales, boost productivity, and improve employee morale. These non-traditional reward programs, which can include gain-sharing, pay-for-knowledge, small group incentive/lump-sum bonus plans are becoming increasingly popular as the traditional merit increase becomes a taken-for-granted, ineffective stimulus."(Freeman)
Bonus plans are needed because, "Bonuses give employees an added incentive to complete projects on time and to seek out upcoming projects they can work on." (Bowers 2003) Many large companies are notorious for the types of bonus plans that they offer. These bonus plans run the gamut from monetary rewards to exotic weekend giveaways. In any case, the use of bonus plans has become deeply entrenched in the fiber of American business.
Consequences of bonus plans study published in the Journal of Managerial Issues, and conducted at a large service corporation discusses the impact and consequences of bonus plans.
In this particular study merit bonus plans were examined. The authors explain,
Under a new pay system implemented by the Corporation, all exempt employees were to be compensated by a two-component plan. The first component consisted of base salary and the second component consisted of a merit pay bonus, which would be allocated to employees based upon their rated performance in relation to preset goals. The merit bonus was designed to make a portion of employees' pay variable; this portion was to be contingent upon job performance. Therefore, total compensation theoretically could vary significantly with current performance. As a part of the pay plan, individual goals were established, with employees and their supervisors agreeing on the range and scope of the tasks to be performed by the employees during the annual rating period. Employees' bonuses were then determined by supervisory ratings of the degree to which preset goals were met. The maximum possible bonus available to an employee who achieved the highest performance rating was 20%." (Amsler et al. 2002)
The participants in the study were in different departments and had various levels of responsibility in the corporation. The study suggests that those in top positions benefit the most from bonus plans and have a higher level of job satisfaction. The study notes that bonus plans must be presented to employees in a manner that is equivalent to the hard work that they have displayed according to their individual skill levels. The study concedes that when mangers fail to properly compensate employees there can be diverse consequences. These consequences include; decreased morale, animosity among workers, lower productivity and poor employee loyalty. When such consequences arise the impact can be devastating and it may be difficult for the company to recover. (Amsler et al. 2002)
There is an overwhelming consensus that the worst consequences of bonus plans is that they reward people that have not earned a bonus. Many argue that bonus plans often backfire because they reward people even if they perform poorly. According to an article entitled, "Business Plans: Why Most fail" when an employee is unable to perform a skill at a high standard than offering that employee a bonus will not enhance the employees' ability to perform the skill. (Porter 2003) The article explains that, "if an employee cannot perform a certain skill, then rewarding their performance will not help. For example, if a salesperson is poor at selling, then paying a commission will not teach them to be a good salesperson. (Porter...
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