Hot topic: Paying bonuses, part two

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Some firms have stopped paying their staff bonuses. Do bonuses encourage short-term thinking?

What should businesses do to evaluate the effectiveness of their reward structures? And do we need an overall simplification of executive pay to curb excessive wage packets?

Stefan Stern, director of the High Pay Centre, says:

"Money does not motivate people. Psychologists have known this for decades. Motivation comes from within. Unfairness in pay can certainly demotivate, but that is a different matter. It follows that employers should be careful in their handling of bonuses.

"Incentives can and do work, but you have to be clear what sort of behaviour you are trying to encourage. Offer people a bonus if they hit a short-term target and they will try and hit it. But will hitting that target damage your long-term ambitions? There will inevitably be some sort of a trade-off between short and long-term objectives.

"The unpopularity of the ‘bonus culture’ is partly to do with the size of awards, and is partly also a technical and linguistic problem. The world of finance uses the word bonus in a way nobody else does, that is: it can be a huge multiple of basic pay. To the rest of us a bonus is usually something small and unexpected: a pleasant surprise. The way high finance uses the word bonus is actually pretty weird."

Chris Philp, entrepreneur and MP for Croydon South, says:

"Remuneration policies for large public companies are not working as well as they should. Studies have shown high pay often negatively correlates with performance.

"We need a system where shareholders are more active as owners of companies. By making non-executive directors more connected with shareholders they will be more focused on remuneration policies that produce longer-term thinking and better outcomes for those stakeholders.

"I believe a Shareholders Committee, made up of the top five holders, is best placed to work with Remuneration Committees to deliver effective payment structures that will be varied but long-term in nature.

"Pay structures should be tailored to the individual business and circumstances but they should avoid excessive complexity to allow shareholders a clear view when they exercise their votes."

Read part one of this Hot Topic, with the CIPD's Peter Cheese and Woodford Investment Management's Craig Newman.

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