Many organizations offer a substantial contingent compensation component (incentive bonus schemes) to many employees as part of the overall pay package – 20-50% of total compensation is ‘at risk’. This is especially the case for executive level staff and sales staff. (It is noted that most not-for-profit associations do not use contingent compensation, or where done it is typically only 5% of base salary.) Somehow this ‘risk factor’ is supposed to be motivational.

In my view such contingency plans are fraudulent – they don’t create a motivated workforce, only a cynical one. Many scholars see such bonus schemes as counter productive (See Daniel Pink, Frederick Herzberg). Such ‘incentive’ schemes may cause the executive to lose focus on what the organization truly values or distract them from real opportunities the organization may encounter. Moreover bonuses often are paid out even though the organization failed to meet objectives, and so are expected; there is no ‘risk’. We should not make our employees into

[psychological] mercenaries. I recommend against any supplementary ‘contingent compensation’ component to organization pay practices: pay people full salaries comparable to ‘total compensation’ as reported in surveys. Then just watch them perform. That said I do see value in offering from time to time unscheduled discretionary performance bonuses in recognition of an extraordinary contribution.

I think another fraudulent pay practice is stock options. This payout comes at the expense of the external stock-purchaser who is at much greater risk in evaluating the true situation in a company. Stock options are more like the gamblers fallacy, using someone else’s money; the employee stays just long enough to collect on his/her options, and then moves on to the next company. Or watch the options become new wallpaper for their bathroom walls when the stock doesn’t appreciate as expected. Options don’t reinforce desired behaviour in the best interests of the company. I do think employees (and certainly senior executive employees) should have real ‘skin in the game’ which induces a psychological attachment to the company; but instead of options they should be encouraged to own company stock through purchase at current market rate, perhaps with matching grants.

In addition to stock ownership I think various forms of profit sharing for all employees can create strong feelings of attachment and engagement in the organization. These must be carefully designed and equitably administered.

One more time: For employee engagement, pay people fairly: competitive and internally equitable [total] salaries, profit sharing on the same basis for all employees; and (voluntary) stock purchase plans.