Unintended Consequences of Bonus Plans Term Paper

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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 2003) Although managers do not aim to reward poor performance, many bonus plans, especially those that are not based on merit, inadvertently reward employees that perform poorly. (Porter 2003)

According to an article entitled "Bonus Plan Rx: First Aid for Short-Term Incentive Plans" there are several other consequences of bonus plans. These consequences include;

Bonus plans that are unaffordable for the firm -- in many cases managers ignore the financial aspects of creating a bonus plan and end up not being able to handle the financial obligations that the bonus plan requires. (Dalik and Goldman)

Insufficient support for the implementation of the bonus plan form stakeholders -- the stakeholders in a firm need to be in support of a bonus plan if it is to be properly implemented (Dalik and Goldman)

The absence of bonuses or "Windfall" bonuses which are the result of factors that are out of the employee's control -- once a bonus plan has been implemented, employers must make good on their promises. They have to make sure that external factors do not interfere with how they implement a business plan strategy. (Dalik and Goldman)

Employees' unwillingness to alter their performance to correlate with the business strategy of the firm -- this occurs when bonus plans are not given on the basis of merit. When this occurs employees feel as they don't have to change their performance to receive and reward. (Dalik and Goldman)

Unreasonable focus on a few business strategies -- companies that have implemented bonus plans must focus on the overall strategy of the firm and not only on the strategies that impact the bonus plan

Dalik and Goldman)

Bad performers that receive too many bonuses and good performers that don't receive what they deserve -- this is the consequence that we focused on earlier in our discussion. This consequence can have a profound impact on productivity and employee loyalty. (Dalik and Goldman)

Workers that are unaware of the correlation between bonus rewards and the level of their performance -- there must be clear understanding of why an employee is receiving a bonus because if they do not know the purpose of the bonus their work performance will remain stagnant. (Dalik and Goldman)

Exclusive plans that disenfranchise lower level employees and solidify inappropriate hierarchical structures -- employers must be careful to avoid showing favoritism to high level employees. Managers must remember that employees at every level are essential to the success of the firm and reward them accordingly.

Dalik and Goldman)

As you can see there are many consequences that can occur when bonus plans are not properly implemented. When these consequences occur the benefits that bonus plans provide are diminished and employee morale is weakened. The following paragraphs will explain how the negative consequences of bonus plans can be avoided.

Avoiding the Negative Consequences of Bonus Plans

The article, "Bonus Plans: Why Most fail" explains that one of the best ways to avoid the negative consequences of bonus plans is to simply offer a fair wage. (Porter 2003)

The author argues that the consequences associated with bonus plans could be eliminated if employers offered a living wage that is higher than that of similar companies in the same community. (Porter 2003)

The author contends that offering a living wage coupled with holding employees accountable for their performance, will create the benefits that a bonus plan offers while avoiding the consequences that bonus plans present. (Porter 2003)

The article entitled, "Bonus Plan Rx: First Aid for Short-Term Incentive Plans," also explains that there are several ways to avoid the negative consequences of Bonus Plans. The article explains that there are four steps that can aid a firm in diminishing the problems associated with bonus plans. These four steps include; employment involvement, utilization of bonus review committees, avoiding failure of the proposed business plan and creating a realistic blueprint of the bonus plan strategy. (Dalik and Goldman)

Employment involvement is vital to the success of a bonus plan. According to the article, employee involvement can take place in focus groups, which discuss what employees need from a bonus plan. (Dalik and Goldman) In addition, employee involvement will aid employers in understanding the influence that the bonus plan will have on employees. (Dalik and Goldman)

The article also argues that the use of bonus review committees help companies avoid the consequences of…

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