Performance bonuses are additional compensation given to employees for exceeding expectations. They are often given at the end of the fiscal year and can be in the form of stock options or retirement plans. The effectiveness of performance bonuses has been statistically validated, but determining the appropriate performance levels can be difficult. Performance bonuses are often only given to management and executive staff, with ordinary employees receiving no incentive. Camouflage compensation, such as stock appreciation rights and supplemental executive retirement plans, can make it difficult to track the true value of performance bonuses. The practice of performance bonuses has come under scrutiny and attempts have been made to limit it by the US government.
A performance bonus is a form of compensation from a company to an employee that is made on top of the normal wages or salary that is paid. There are different types of performance bonus payment methods, as well as different reasons for making payments. Typical bonus payments often come at the end of a fiscal year and are rewards for an employee’s individual and team work for the company that exceeds expectations. Aside from the standard year-end bonus, executives often receive additional compensation in the form of employee stock options or a lucrative retirement plan known as a golden parachute. These types of executive bonuses fall into a category known as camouflage compensation which is often done by companies when they want to hide from investors and the government the actual amount of monetary compensation going to senior staff.
The annual performance bonus has become a staple method of compensation at many levels of management in various industries due to the statistical validation of its benefits compared to other types of compensation. Research from 2006 revealed that giving employees a 1% raise increased their job quality by an average rate of 2%. By increasing pay at the same rate with a lump sum bonus linked to the employee’s exceptional contribution level, the increase in job performance is increased by a factor of 20%.
A difficult aspect of maximizing the major contributions of employees to a company is determining what performance levels to set bonus pay. If the level is achieved too easily, the bonus won’t have much meaning as most employees will get it, and if it’s too hard to achieve, employees won’t work on it as it would seem unrealistic to achieve that goal. Where a performance bonus is not paid due to invalid goals, companies often issue discretionary year-end bonuses to avoid negative feedback from a failed performance-based system.
A standard-level approach to performance bonus involves a minimum bonus payment when an employee meets 80% of the company’s productivity goals, a standard bonus when the employee is at 100% performance level, and a maximum company bonus when the employee exceeds expectations by having a productivity level of 120% or higher. These bonus levels, however, are in most cases only offered to management and executive staff who are paid salaries, with ordinary employees in a company often receiving no incentive for performance. As of 2011, the typical scale for performance bonuses as a percentage of annual salary for an employee in the United States ranged from 10% for the lowest level of executives up to 60% to 100% of a year’s salary for senior executives. high level in companies.
Where camouflage compensation comes into play, the true value of performance bonuses can be difficult to track. These types of payments can vary based on market conditions, such as a stock appreciation right (SAR), which is a bonus tied to the increase in the value of the company’s stock during an arbitrary period of time. Another performance benefit that is an element of the golden parachute idea is the Supplemental Executive Retirement Plan (SERP), which offers retirement benefits well in excess of those offered to other employees in a company through individual retirement accounts standard (IRA) and so on.
The nature of performance bonuses has come under increasing scrutiny and attempts at new laws to limit the practice by the US government in the wake of the financial crisis that occurred in 2008. In 2009, performance bonuses paid at the banks and on Wall Street the executives broke many precedents, despite the fact that the companies that paid them lost money, were no longer active, or received large sums of taxpayer-provided federal bailout funds to stay afloat. Billions of dollars in bonuses have been awarded to staff at bankrupt insurance giant AIG or to record-losing companies such as Merrill Lynch, totaling $18,400,000,000 in bonuses paid by US companies in 2009 alone.
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