Bonus systems must suit the business model

Otherwise, they might encourage a culture of short-termism within the organisation

According to a global poll of 6 500 financial decision makers carried out by the Chartered Institute of Management Accountants (CIMA), South Africa has the fourth-most meritocratic bonus system in the world. However, while 72% of South African finance professionals feel that bonuses are an excellent way to motivate staff and guarantee long-term business success, 46% also felt awarding bonuses based on performance in one area of peoples’ responsibilities encourages an over-focus on that while devoting less attention to other activities.

Of respondents whose companies operate a bonus scheme, over a quarter (27%) of South African finance professionals feel bonuses for top earners – including salespeople, fund managers board members and more – are underserved. The CIMA, therefore, argues that bonus systems should be designed to encourage long-term success rather than only short-term performance.

Professor Wim A Van der Stede, CIMA Professor of Accounting & Financial Management believes the findings of the 2016 study reaffirm some well-known issues of incentives related to a narrow focus on what is rewarded and other myopic behaviours.

“But they also suggest that perceptions of ‘unjustified’ bonuses, whether stemming from ineffective incentive designs or not, can trigger resentment and undermine employee engagement and motivation. This hurts performance, exacerbates myopia and corrodes culture. Designing effective incentive systems is hard, yet incentives that may be fair may not look fair – a challenge that touches on the issue of transparency as well as the question of both ‘how’ and ‘how much’ to incentivise.”

CIMA Regional Director for Africa, Badibanga Promesse says bonuses are a trust issue as much as a financial issue and that, If customers and stakeholders perceive a company to be paying exorbitant sums to its employees, it will effect that company’s reputation and erode the trust in which they are held.

Says Promesse: “This is something we saw time and again following the financial crisis. So, boards need to think carefully about their bonus structure and this applies to all levels within the business. Current schemes often only focus on ‘hard indicators’ such as short-term revenue, but they should also seek to reward any other evidence of the employee's contribution to helping the organisation plan and build for the long term. As a bare minimum, they need to ensure incentives are rooted in a firm understanding of the business model and are aligned to long-term business success.

“That’s why our new framework to support the understanding of boards of their business models is so important, focusing on how value is shared – what is reinvested, paid in taxes, and distributed to staff and investors. In this context they should go further, looking at the size of bonuses and the differential between the highest and lowest earners, ensuring both are justifiable to wider stakeholders. Doing so is a big step towards building better businesses, trusted by society.”