Duncan Brown: Do executive bonuses really work?

If you were offered a cash bonus, would it make you work any harder or better? How about a 250% bonus?

That was the maximum available to WPP chief executive Sir Martin Sorrell last year. However, 60% of shareholders voted against his £6.8 million package at the annual general meeting. under his new scheme, that maximum will fall to a mere 217.5%.

That seems strange to me. if you believe bonuses work, then presumably you believe the bigger they are, the more impact they have. And if you believe they don’t work, then you don’t have them at all.

Dan Pink, author of Drive, argues that money doesn’t motivate and that autonomy, mastery and purpose are the keys to engaging staff. His brilliant RSA talk should be required viewing for remuneration committee chairs.

In early May, the European Parliament voted for a bonus cap of 100% of salary for bankers in the EU, starting in 2015. That was presumably on the basis that they believe big bonuses can work too well. The then chairman of the Financial Services Authority, Adair Turner, said that “inappropriate incentive structures played a role in encouraging behaviour that contributed to the financial crisis”.

Carlo, who runs Timpson’s Twickenham branch, thinks bonuses work well. The owner of this highly profitable organisation, John Timpson, says in his book How to ride a giraffe: “If you treat people well, it is obvious they will do a good job.” Timpson’s reward package includes a final salary pension, employees’ birthday off and access to holiday homes.

But Carlo talked about the bonuses. each shop has a turnover target of four-and-a-half- times the wage bill. Some 15% of revenue over target goes to the staff, divided up according to skill levels and hours worked. Timpson believes you have to keep the schemes simple.

Pink, perhaps surprisingly, would agree with him. Research generally supports both: bonuses seem to motivate staff in straightforward, repetitive activities where performance is influenced by the individual. They seem to be less effective, even counter-productive, in more complex work situations.

Robert Greene, chief executive officer of Reward Systems, describes how, as more of us are engaged in knowledge-based work with intangible outputs, and in a tough economic climate, it is getting harder to convince employees that their performance can be fairly rewarded.

Timpson thinks it “is better to reward executives with a percentage of salary based on profits”. Like at John Lewis, where all staff earned an annual profit share of 17% of their pay in March. But if Greene and Pink are right, why do we have executive incentives at all?

Follow Duncan Brown on Twitter: @duncanbHR