Back in the day, getting a bonus based on the performance of the company came standard. If certain goals were met, then you would get a higher bonus because you helped the company get to that point. If they were not met, then you would get less of a bonus. The structure seemed to work, and there were often better results being reported and higher employee satisfaction with pay plans like this. However, in recent decades many companies are starting to wonder if these plans really do help to increase the bottom line or if they hurt the company over the long term.
The main argument for these plans comes from executives and employees that want to feel like they are a part of the company. They get a sense of ownership when they know their pay is tied directly to the performance of the company. They would argue that they are going to work harder to make things better for the company overall. Executives will say that they will start new projects to increase production and come out with new and innovative plans for gaining customers if they knew that they could get a hefty bonus because of it.
Opponents of performance-based pay will say that, even though the company’s performance in the short-term is improved, the long-term goals are being sacrificed by the people in charge just to get a few extra bucks at the end of the fiscal year. They are worried that executives will put off needed capital expenditures and that employees will just work to get production out the door while letting the company fall into disrepair just so they get a larger bonus check at the end of the day.
Jeremy L. Goldstein, of Jeremy L. Goldstein & Associates, is all too familiar with this problem. His firm specializes in corporate law and compensation law, and he has seen both sides of this argument play out several times over. He has suggested that companies pay on performance, but make sure that the metrics also include some longer-term parameters rather than just annual or quarterly earnings. This will give the incentive to keep things up for a long time. Also, he thinks that executives should be held more accountable for their actions. Compensation committees should scrutinize any decisions that the executives make that will also increase their bonus to determine if what they have done is really in the best interest of the company. Overall, Jeremy Goldstein is working hard to bring cases like this to a close and find a solution that works for everyone. Learn more: https://www.crunchbase.com/person/jeremy-goldstein#/entity