From the TUC

Total bonuses reach record high

15 Sep 2016, by in Labour market

Government figures out today show that total bonuses across the economy have reached the highest level ever, surpassing the previous high seen just before the financial crash in 2007-8.

While the financial sector accounts for nearly one third of the total, the rate of increase in total bonuses has been faster in the rest of the economy in recent years – up 5.4% compared with a year ago, compared with an increase of 2.2% for the financial sector.

While total amounts do not take account of the size of the sector, when it comes to average bonuses or bonus per employee, finance still dwarfs the rest. The average financial sector bonus was £13,400, while the next highest was mining and quarrying (including oil and extraction) at £7,200, followed by information and communication at £4,600. The lowest was in health and social work, where the average bonus was close to zero. There is a significant gap between the public and private sectors, with an average private sector bonus of £1,900, compared with an average public sector bonus of around £100, reflecting the fact that the public sector has less of a tradition of using bonuses to pay its staff.

This does not mean, however, that every finance worker receives a £13,400 bonus; the vast majority will be receiving considerably less or nothing at all, while those at the top receive huge bonuses much higher than their annual salary. This pattern is likely to be repeated across other sectors. As well as the sectoral variations in bonus pay, there will also be significant differences in the forms it takes and how much individual workers receive. Some bonuses may be in the form of a profit-share scheme which is paid to everyone in the company on an equivalent basis, while other bonus schemes may be subject to very specific performance criteria that force staff in the same team to compete with each other to receive a bonus. None of these important variations are captured in this data.

Unions are generally cautious about bonus pay for a number of reasons:

  • Bonuses are by definition dependent on some sort of performance criteria, and therefore cannot be relied on as regular income; they can go down as well as up.
  • Bonuses are rarely pensionable; therefore, if bonus pay displaces salary or non-bonus earnings it can erode workers’ retirement income and future security.
  • Research suggests that linking pay to performance does not generally enhance performance – this is discussed further below.
  • Depending on the scheme, the performance criteria used can increase competition and insecurity at work, rather than fostering collaboration and cooperation. This both erodes performance, contributing to the finding noted above, and also contributes to stress and insecurity for staff.

To address the first two points, it is important that bonuses or performance-related elements of pay are in addition to good rates of basic, pensionable pay and do not dominate the total pay package. Today’s figures show that there has been a small increase in bonus payments as a proportion of total pay across the economy as a whole to 6.0 percent. There are, however, huge sectoral variations, with over a fifth (22.1 percent) of total pay in the finance sector being paid in bonuses, whereas in the rest of the economy the proportion was much lower at 4.0 percent, a figure that has been relatively stable since 2000.

The share of total pay paid as bonuses in the finance sector, while remaining very high, is significantly lower than its peak of 34.1 percent in 2007, reflecting concern that the bonus culture contributed to the financial crash by encouraging excessive risk-taking. In the public sector, bonuses made up 0.5 percent of total pay, the lowest proportion of total pay since 2005, suggesting that the previous rise in the use of performance-related pay in the public sector may have started to reverse.

The fact that making pay dependent on performance does not boost performance could seem surprising, but some findings from behavioural psychology may help to explain why this should be the case. One basic point is that specific performance-criteria may distract people from pursuing other objectives that are also important or may have become more so over time. While in theory this could be solved through better design of targets, in practice the difficulties with setting meaningful performance criteria have proved very difficult to address – it is rare that job performance can be reduced to a few indicators, but including lots of indicators makes schemes too complex for people to understand.

Another issue is that if the scheme focuses on individual performance, it may discourage staff from sharing ideas or good practice with colleagues, which will drag down performance overall; in addition, a competitive work environment can create insecurity and low morale, with a consequent drag on performance. Finally, a fascinating finding is that paying for results can reduce what is known as intrinsic motivation – suggesting that the desire to do a good job for the sake of it may be reduced if peoples’ pay is dependent on how good a job they do. This may be because performance-related pay, or certain forms of it, can send a signal to staff that they are not trusted to do their best – which many workers would find a deeply insulting insinuation.

A well designed scheme – for example, a simple profit-share scheme which pays out to all staff on the same basis and which is supplementary to good rates of basic, pensionable pay – can avoid these problems, while allowing staff to share in the success of the organisation for which they work. But bonuses are not a panacea, and today’s figures leave many questions about their use and effectiveness unanswered.