Question:
Bonus schemes
It has been suggested that optimal bonus schemes for profit centre managers promise significant rewards for the achievement of challenging targets in areas they can influence. These schemes balance short-term pressure with incentives to maintain a long-term focus and protect managers from the distorting effects of uncontrollable factors.
It has also been suggested that many bonus schemes have additional features with different motivational effects.
The following are possible features of bonus schemes.
• Limiting the range of performance within which rewards are linked to results, in particular ignoring losses and limiting maximum payments
• Linking incentive payments wholly or partly to the profit of the organisation as a whole
Required
(a) (i) Explain why bonus schemes might include these features.
(ii) Discuss the benefits and drawbacks of incorporating these features into bonus schemes.
Bonus schemes are normally designed to motivate full-time employees who have no other employment and are wholly dependent upon the organisation for their income. Part-time employees and short-term employees might not be included.
(b) Describe and advise on the possible features of bonus schemes which are designed to motivate non-executive directors who are part-time, remunerated by fees under contracts for a fixed number of years and required by corporate governance codes to maintain independence.