The bonus boys (pt IV): a new hope

In the brief, but interesting history of this blog, I wrote a number of articles on the economic phenomenon, called: “The Bonus boys”.

Yesterday, it became again clear that the bonus is indeed an ineradicable phenomenon in The Netherlands. The Dutch company for corporate research Berenschot (www.berenschot.nl) presented a press release on the bonuses for companies with an AEX quotation (link in Dutch). Here is an integral quotation of this press release.

In 2010, the short term bonuses, that were paid-out to the Board of Directors of companies with an AEX or Midcap quotation, soared. Did the CEO’s in 2009 in average get a variable bonus of € 386,963 ($553,357), in 2010 this amount soared to € 564,999 ($807,948). This is found in the yearly annual report-analysis that is executed by Berenschot. The performance indicators that should form the basis of the bonus, are in reality hard to discover. 

From the annual report-analysis of a.o. the salaries and short-term bonuses of the AEX and Midcap companies, it becomes clear that the bonuses of CEO’s and members of the Board of Directors have soared in 2010. Over 80% of these companies made a profit in 2010 and therefore it could be expected that bonuses were handed out. Notable, however, is that there seems to be no clear relation between the decrease or increase of net profit and that of the short-term bonus.

The expectation is that, at companies with a shareholder-driven organization model, the stock market price is one of the performance indicators to which the allowance of the variable remuneration is related. However, from the analysis of Berenschot it is found, that there is no relation between the increases and decreases of the stock market price and the handed-out cash bonus. With 5 of the 25 AEX companies, the stock market price per December 31^st, 2010 was lower than the previous year. Still, three CEO’s from this group received a higher bonus than the previous year. “You could conclude that the effect of the short-term bonus as a performance catalyst is losing more and more momentum. The short-term bonus changes with that into an instrument to tie you senior executives to the company”, according to Rutger Verbeet, Senior Managing consultant at Berenschot.

It can be a justifiable strategy to pay out the short-term bonuses to the senior executives of a company, even if the stock market price dropped: for instance, when there have been enormous achievements on certain areas within the company or when tough decisions have been taken by the senior executives that will have a lasting positive long-term effect.

What I am not in favor of is when company just pay bonuses for the sake of it, with reasons like: ‘everybody does it’, or ‘we don’t want our senior executives to leave in the meantime, when they get a better offer’.  These are the same reasons that push professional football (soccer) teams to pay higher and higher salaries to their best players, while bringing their clubs on the brink of bankruptcy.

An incentive –  like a bonus –  is only useful, when it is paid out as a reward for extraordinary achievements or for reaching clear and hard-to-achieve targets; not when it is treated like a privilege for the senior executives, as these seldomly do the real hard work in their companies.

If you want to keep your senior executives and you really think that these ‘giants’ are irreplaceable, give them a better basic salary; not a bonus for bogus reasons. In this case, the true short-term bonus can be reserved for the real giants with the truly, extraordinarily achievements. This diminishes also the chance for moral hazard (when the achievement of counter-productive, short-term goals comes at the expense of the long-term health of the company) and it offers more transparency to the shareholders than in the current situation.

But I am afraid that this won’t happen, as long as CEO’s can virtually decide their own salary and emoluments.