The fairness perception of bonus payment allocations

Given the costs and benefits of subjectivity, the question we try to answer in our study is when subjectivity is beneficial and when it becomes harmful. On the basis that a picture paints a thousand words, let’s look at real-life examples of varying bonus-related payment structures to demonstrate a number of the lessons to be learnt. They are drawn from the working experience of John, a hypothetical employee who worked in different positions and industries, from selling suits as a student to being a middle manager in the news industry to working as an executive in the international banking industry.

While working for a traditional clothing retailer as a student, John was compensated by dual component remuneration. This was made up of a basic weekly wage, which could be doubled through earning a sales commission. Sales targets were transparent and clear, creating a nearly immediate link between effort and reward.

But during times of financial crises, fewer customers visited the store. Those who did visit shoplifted as much as they bought, and even though John worked very hard on making sales to every customer who came through the doors, he failed to meet his targets. It was in these times that he felt that his extra effort should have been recognised and rewarded by his boss on aspects other than objective sales performance.

Sometime later, while working as a middle manager in the news industry, John found himself in a world in which a bonus system was in operation, but which was allocated in its entirety by top management on the basis of opaque criteria unknown to the employees.

One morning John came to the office to find his colleagues all excited about the bonuses that had just been paid. Unlike that of some of his colleagues, his own salary statement contained no reference to any bonus payment. Later he found out that the biggest bonuses went not to the hardest working, most profitable or most eager to co-operate with senior management in achieving strategic and tactical goals. They went instead to the employees who were most successful in ingratiating themselves with top management. This is a classic example of a process and outcome that is entirely subjective, delivering results that were perceived to be arbitrary, unfair and utterly demotivating. Not long after this incident, John left the company for good.

Finally, while working for an international bank, our salesman turned middle manager turned would-be banker John benefited from a profit-sharing scheme, payments under which were decided worldwide at board level according to a pre-set formula linked to annual earnings and the publicly quoted share price. Moreover, this could be overridden in special circumstances; such as in the case of a spectacularly ill-conceived acquisition on the west coast of the USA, over which the ordinary staff member had no control and which had a devastating impact on the bank's earnings. This is slightly more complicated than the systems outlined before, but was at least perceived as fair by the majority of the company’s employees.

In sum, it is important to note that creating a healthy amount of subjectivity can strengthen fairness perceptions. This gives supervisors the opportunity to recognise employee performance that is difficult to measure objectively without rendering the decision process completely opaque and subject to human bias. But as John's experience shows, whichever system is implemented, openness and clear communication are essential.