Making Bonus Systems Fair and Crisis Proof

11 Pages Posted: 12 Mar 2009

Date Written: March 11, 2009

Abstract

While the current financial crisis has challenged nearly everyone from management to media, it has exposed some fundamental flaws in management pay. In recent years, bonuses have been too high in up-cycles and they now risk being too low in the current downturn. Adopting an investor's perspective addresses the impact of external factors in distorting actual performance. By measuring operating performance only - irrespective of the economy's performance - bonus systems become fairer and longer lasting. This article illustrates options for designing bonus targets using Bell Helicopters, owned by the industrial conglomerate Textron, as an example.

Keywords: value based management, pay for performance, incentive systems, indexing operating performance, indexed bonus targets, bonus, performance, indexing, operating alpha, operating index, operating rank, EVA, Economic Profit, EVA bonus system

JEL Classification: M52, J33, G31, M12, M10

Suggested Citation

Stern, Hermann J., Making Bonus Systems Fair and Crisis Proof (March 11, 2009). Available at SSRN: https://ssrn.com/abstract=1357723 or http://dx.doi.org/10.2139/ssrn.1357723

Hermann J. Stern (Contact Author)

Obermatt Inc. ( email )

Schifflande 26
Zurich, 8001
Switzerland
+41 44 576 42 30 (Phone)

HOME PAGE: http://www.obermatt.com

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