Friday, March 20, 2009

Are bonuses bad?

AIG outrage has consumed the radios airwaves, blogs, and even Jay Leno's Tonight Show discussion lately. I would of course agree that AIG had no business paying bonuses out to executives of a failing business that has received multiple bailouts from the US government. However, to say that all bonuses are bad would be a mistake. Lots of people earn part of their annual pay on bonuses. Most salespeople, business professionals, and professional athletes get bonuses of some type as a reward for meeting or exceeding their goals for the year. Bonuses, if constructed properly, can motivate individuals to perform to higher levels than they might otherwise do on their own without any incentives. Most people who are upset about people getting bonuses, I suspect, are people who are salaried folks or hourly wage earners. But what would happen if you took away bonuses? What would happen is that companies would have to pay their sales force much higher salaries to attract talent. And salaries, as you know, are paid out regardless of performance. So if a star salesperson has a bad year, he gets paid the same as he would if he had a good year, or a great year. How do you reward performance now? Give him a watch, or a trip to Hawaii? Look what happens in the sports world. Marc Bulger was given a high salary without any incentives a few years ago after Kurt Warner was released, and he hasn't done squat since (of course he didn't get much help from his offensive line either). Most people are motivated to do better by a monetary incentive. It's the carrot on the end of the stick principle. AIG should not have paid out bonuses to their already highly paid executives, but commissioned sales people who are just trying to make a living like everyone else should be able to get bonuses to reward good years.

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