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.
The main concern expressed by professionals’ 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.
The survey found that of the 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.
CIMA also suggests that getting bonus pay structures wrong can damage a company’s reputation and therefore its own long term performance which could therefore affect the share price of listed companies.
Tony Manwaring, Executive Vice-President – External Affairs at CIMA, said, “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.”
This research comes as figures published by the Office of National Statistics show that in the financial year ending March 2016 the combined value of all bonuses paid in Great Britain was a record £44.3 billion, surpassing the previous highest amount seen in the financial year ending 2008 and 4.4% higher than in the financial year ending 2015. The largest contributors to this record level of bonus payments were companies in the financial and insurance sectors, at £13.9 billion, an increase of 2.2% over the year. Financial and insurance companies paid the highest average bonus per employee, at £13,400, while the health and social work industry paid the lowest average bonus per employee at close to zero.
Last Updated: 18 September 2016