The Financial Controller and CFO's Toolkit, 3rd Edition

Chapter 20Performance Bonus Schemes

OVERVIEW

Performance bonus schemes can be seen as an annual entitlement, be very costly, create endless arguments and not lead to notable improved performance. This chapter explores the foundation stones CFOs and controllers must be aware of if they are involved in designing or fixing a bonus scheme. It was first published in my book The Leading Edge Manager's Guide to Success.¹

Performance bonus schemes have broken down across a wide range of organizations and they can be very costly without improving performance. This chapter is written for the CFO, or controller, who has been asked to design a performance bonus scheme based on better practice or to fix the current broken one. Jeremy Hope² summed up the situation in this quote:

“…But despite hundreds of research studies over 50 years that tell us that extrinsic motivation (carrot and stick financial targets and incentives) doesn't work, most leaders remain convinced that financial incentives are the key to better performance.”

THE BILLION-DOLLAR GIVEAWAY

Performance bonuses give away billions of dollars each year based on methodologies where little thought has been applied. Who are the performance bonus experts? What qualifications do they possess to work in this important area, other than prior experience in creating the mayhem we currently have?

When one looks at their skill base, one wonders how they acquired the credibility in the first place. Which remuneration expert advised ...