A Bias for Bonuses: What It Means for Your Paycheck

The article, “A Bias for Bonuses: What It Means for Your Paycheck,” posted on September 5, 2014 on the Knowledge@Wharton blog details the podcast that Ken Abosch, the compensation, strategy and market development leader at the human resources and consulting services firm, Aon Hewitt, and Wharton management professor Iwan Barankay created to discuss the trend shifting from raises to bonuses. The article claims that, “More and more companies are moving toward giving performance-based bonuses instead of handing out pay raises unrelated to results achieved on the job.” This means that employees may only receive an increase in compensation if their performance has earned it. This dynamic really puts the employer in the position of power because the employer then gets to determine who gets an increase and who does not. In fact, “Wharton management professor Iwan Barankay noted that the balance between the salary component and variable pay reveals who has more bargaining power —and that employers are increasingly coming out on top.” Some industries are favoring this compensation strategy and implementing it immediately. In the podcast, “Abosch noted that Denver and Houston lead the pack on pay hikes because of the concentration of energy companies in those cities. The energy industry is the leader in not just variable pay, but also salaries, he added.” It seems that the energy industry is trailblazing this trend because it gives power to the employer and may motivate the employees. “The industries that can expect to see the highest salary increases in 2015 include energy/oil/gas (3.8%), real estate (3.4%), telecommunications (3.2%) and pharmaceutical (3.2%), according to Aon Hewitt. The lowest increases are projected in education (2.7%), government (2.6%) and forest and paper products/packaging (2.6%).” It is interesting to note here that energy companies are projected to drastically increase salary, and they are also one of the industries that gives out the highest bonus rewards. This information circles back to the question as to why this trend has become so wildly popular in recent years. “According to Abosch, employers’ preference for bonuses is a result of the strengthening economy and some tightening in the job market.” This is one possible reason that makes logical sense. If the economy is stable and profits are healthy, then employers may like to reward their top employees. Furthermore, “Employers also see bonuses as a useful tool in motivating employees, he added. ‘[Also], shareholders and analysts like seeing that employees [have] skin in the game.’” Linking compensation increase to performance may motivate some employees, but it may also have adverse consequences. If employees feel their compensation is based mostly on performance bonuses, then they might feel more inclined to engage in risky behavior. Employers may end up rewarding employees who perform well mostly by gambling and getting lucky.

The article reads; ‘Barankay noted that the latest trends reveal that employers are gaining increasing leverage over employees. ‘If it were the case that the job market really picked up very strongly across the board, then you should see a strengthening of the base pay,’ he said. ‘Instead, you see these performance-related pay [increases], which basically give a lot of money to those who perform the best. And that really reflects that employers have a lot of power at this point in time.’

Creating a highly individualistic work environment that rewards only the people who make it to the top also takes a toll on team spirit and collaboration. The decision to give either incremental pay increases or rely heavily on variable pay comes down to a question of culture. If you want your company to value high-risk/high-reward competition, variable pay may be a great motivator. If you want your company to invest in innovation, teamwork and creativity, other pay options might be a better fit.

Author: Dana Millio

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