If your company gives out bonuses, then it is probably based on two things. The first is your personal performance and how well you did this year. The second is probably the performance of the company as a whole. If the company hit its earnings targets, you probably got a little extra. If not, then you might not have gotten a bonus at all. This type of bonus is called a performance-based bonus and it has been the most common type of incentive program used by companies for years. However, now analysts and activists are starting to call into question if these types of incentive plans really help the company in the long run. Learn more: https://www.facebook.com/jeremy.goldstein.12
The main argument against these plans is that executives and employees may not be putting the long-term goals of the company first, trying instead to increase short-term profitability just to meet their goals and get their bonuses. This may be especially true if an executive is going to be retiring in the coming months. There have been stories of CEOs stopping all capital projects and other expenses that the company direly needs but will decrease the bottom line earnings of the company in order to increase his bonus. There have also been stories of employees drastically reducing the quality of their work in order to get more product out the door and increase sales. In both of these scenarios, the short-term earnings of the firm look better, and higher bonuses would be paid. However, in the long-term, the company is the one that suffers. Not spending on capital projects will create an obsolete company and lead to higher repairs and maintenance expenses in the future. Shipping low-quality product will create customer relations issues and might decrease the customer base in the future, leading to a worse outlook for the company.
Jeremy Goldstein, a noted lawyer in the compensation and corporate law space, has weighed in on these plans. He and his boutique firm in New York, Jeremy L. Goldstein & Associates, has been working with companies like this for years to determine the best course of action and strategy for compensation in times of major transition. He has suggested that companies keep performance-based pay plans, but they put more forward-looking metrics into the mix. Instead of just payout out based on earnings, maybe they should also pay out if the company is on track for its 5-year plan. In this way, employees and managers will feel the pressure to continue successes for many years instead of just one.
Jeremy Goldstein has also suggested that compensation committees should focus on the actions of executives, especially when there are bonuses at stake. They should question all of the decisions of the C-suite to make sure their decisions are in keeping with the goals of the company. In this way, everyone gets what they want, and the company will be able to thrive into the future.