Making Bonus Systems Fair and Crisis Proof
11 Pages Posted: 12 Mar 2009
Date Written: March 11, 2009
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
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