How to Structure Bonuses Without Incentivising Bad Behavior

Chris Gaetano
Published Date:
Oct 26, 2017

While bonuses can be a great tool to drive productivity, a poor design can create incentives for bad behavior. How should companies structure their bonus programs to retain all the benefits while avoiding the ethical pitfalls? An article in Quartz said that whether or not a bonus structure is a scandal waiting to happen is highly influenced by seven key factors. While the article goes into things in much more detail, they are: 

* How much someone's overall pay is linked to their bonus (the more earnings are linked to incentives, the more temptation there will be to game the metrics); 

* How often are bonuses paid out (quarterly bonuses, versus annual or semi-annual,
 encourage short-term risk calculations that may rationalize unethical behavior); 

* The difficulty of completing the incentive before the bonus is paid out (the higher the target, the more incentive there is to cheat, especially if someone is just short of meeting it) 

* Who gets bonuses (sales, for example, is a high risk area); 

* Whether incentives are based on individual, team or company performance (individuals might seek to benefit themselves at the expense of the company for a bonus that goes only to them); 

* How bonus targets are determined and how management responds to failed goals (if management sets unrealistic targets and punishes people for failing to meet them, workers will be more likely to fudge numbers); and

* What kind of bonuses senior executives get (scandals from top leadership have a very big impact). 

Poorly-structured incentive systems have been at the heart of many corporate scandals, including Barclays, Tesco and, more recently, Wells Fargo.

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