The UK has the second-least meritocratic bonus system in the world, according to a global poll of 6,500 financial decision makers carried out by The Chartered Institute of Management Accountants (CIMA). The organisation is calling for bonus systems to be designed to encourage long-term success rather than only short-term performance.
Of respondents whose companies operate a bonus scheme, more than a third (35%) of UK finance professionals feel bonuses for top earners – including salespeople, fund managers board members and more – are undeserved, a proportion only topped by the United Arab Emirates where 42% felt they were unjustified. 62% of UK professionals felt unjustified bonuses caused resentment amongst their colleagues, rising to 97% amongst workers in the North East. As a result, CIMA is calling for bonuses to be rethought so they reward work which can be shown to benefit an organisation’s full business model in both the short and the long terms.
Professionals’ top concern about bonuses is that rewarding the performance in only one area of peoples’ responsibilities encourages an over-focus on that while devoting less attention to other activities. This might narrow down the idea of what success should look like, rather than encouraging the joined-up thinking on which sustainable results depend. Of those respondents who work in companies that operate a bonus scheme, nearly half (48%) felt bonuses rewarded short-term performance at the expense of long-term goals. Internationally, the UK came fifth in a ranking of firm’s awarding bonuses according to short term results, a table topped by China and New Zealand.
Professor Wim A Van der Stede, CIMA Professor of Accounting & Financial Management, said: “These findings reaffirm some well-known issues of incentives related to a narrow focus on what is rewarded and other myopic behaviors. 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 incentivize.”
Interestingly, while men were more likely to agree that bonuses encouraged short-termism than women, they were also more likely to agree that the performance benefits outweighed the downsides. Nationwide men were almost twice as likely (34%) than women (19%) to believe their bonus might top a fifth of their annual salary.
Professionals from the East of England (41%), the North East (41%) and Scotland (40%) were more likely to believe that bonuses were unjustified, as were those aged 50-54 (39%). Those from the South East and East Midlands and those working in consultancy practices were more likely to agree that top-earners deserved their reward.
Tony Manwaring, Executive Vice-President – External Affairs at CIMA, commented: “Bonuses are a trust issue as much as a financial issue. 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. 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 evidence the employee is 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.”
Resentment at unjustified bonuses rises with age, with half of those aged 55-59 feeling this way compared to 36% of those under 30. Interestingly it was this older age group who were the most likely to be receiving the highest proportion of their wages as bonuses. Overall 29% of UK bonus recipients stated their bonuses had the potential to reach 20% of their annual salary, a proportion highest amongst CIMA members working in London, the banking or financial sectors. Nearly eight in ten (78%) respondents working in London reported that their company operated a bonus schemes, falling to just under half in Northern Ireland (47%) and the North East (46%).
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