Introduction
Contemporary business organizations engage in different practices in order to ensure high quality products and services. Most business enterprises have employed in order to boost productivity of their employees. As a form of financial incentives, the business enterprises within the banking sector have introduced bonuses (Jarque & Prescott, 2010). Nonetheless, the use of bank bonuses continues to raise concerns and debates over its effectiveness in attracting and retaining talent and high productivity. The following is a critical evaluation of effectiveness of bank bonuses especially within the contemporary banking sector. In addition, there are specific recommendations in respect to bank bonuses.
Effectiveness of Bank Bonus
Moreover, the effectiveness of bank bonus stems from the fact that it (bank bonus) creates a stronger alignment of various forms of applicable incentives to both medium and long term creation of shareholders’ value (Stover & Mullaly, 2004). Various incentives, both medium and long term, are employed in order to create higher values for shareholders. Unlike traditional performance measures, bank bonuses have been able to align the existing incentives, whether financial or otherwise, to the existing terms of creating shareholders’ values (Tung, Baird & Schoch, 2011). As a result, the contemporary banking sector has resorted to bank bonuses in a bid to enhance such alignments (Tahir, 2006). Alignment of the incentives enhances the effectiveness of the performance incentive.
It is important to note that the use of bank bonus lessens various opportunities applied in meeting specific set targets without taking into considerations the overall performance of an enterprise. Banks identify specific opportunities that would enable them to meet specific targets (Tahir, 2006). However, such opportunities may be cumbersome and ineffective especially given the increased competition within the contemporary banking sector (Stover & Mullaly, 2004). Consequently, many banks have decided to develop better ways that would lessen the opportunities employed in meeting specific targets (Jarque & Prescott, 2010). One such way is the bank bonus. This is because the bank bonus as a performance incentive will enable them to have a lesser burden with respect to available opportunities for enhancing the productivity of the involved shareholders (Taleb, 2009). Bank bonuses continue to be a good avenue for the banking sector that lesson opportunities aimed at meeting specific set targets.
Shareholders, regulators, and the general public obtain assurance that any person who works hard will definitely be rewarded (Jarque & Prescott, 2010). As a result, many employees and other stakeholders will employ their best in order to achieve specific set targets (Stover & Mullaly, 2004). When the involved shareholders focus their goals in achieving specific targets and goals for the purposes of obtaining reward will definitely perform better. Bank bonuses are usually tied to specific targets such that any involved shareholder who does not meet the set target will definitely miss out the reward (Sara, 2010). On the other hand, the other stakeholders who may not be working hard can be motivated by the rewards obtained from other stakeholders (Nisar, 2006). Therefore, it is indisputable that bank bonuses have been effective in making involved shareholders to enhance their productivity in order to obtain rewards.
Nevertheless, amidst the effectiveness of bank bonuses, there are associated difficulties, which need to be addressed in order to achieve the objective of the business practice (Tahir, 2006). The epicenter of the difficulties is management and communication of the bank bonus schemes whilst ensuring that the effectiveness of the scheme is maintained as a performance scheme (Nisar, 2006). Many banks fail to manage and communicate the performance incentive whilst maintaining its effectiveness (Taleb, 2009). What’s more, when promised bank bonuses, employees and other involved stakeholders feel that they (bonuses) are not secure and it may require a lot for them to be paid out to them (employees and shareholders).
Recommendations and Conclusions
In conclusion, it is important to note that bank bonus is both a practice and a strategy that businesses within the banking sector use in order to attract and retain talents besides enhancing performance and productivity. There is no doubt that bank bonuses have been effective in fulfilling their objectives (Nisar, 2006). However, it is worth noting that there are associated difficulties especially with respect to the fact that it is harder in practice that shareholders and involved stakeholders may take bank bonuses to be within various business sectors. Therefore, it is recommended that banks should shift from “me too” approaches and other traditional performance incentive approaches to bonus banking given the above effectiveness. It is also recommended that every enterprise needs to assure their shareholders and employees on the bonuses that they have been awarded.
References
Jarque, A., & Prescott, E. S., 2010, Optimal bonuses and deferred pay for bank employees: implications of hidden actions with persistent effects in time. Federal Reserve Bank of Richmond Working Paper.
Nisar, T. M., 2006, Subjective performance measures in bonus payouts. Performance Improvement, Vol. 45, No. 8; Pp. 34-40, 44.
Sara, S. M., 2010, Bank earnings: More banks will share bonus pain. Wall Street Journal.
Stover, K., & Mullaly, D., 2004, Moving from bonus to incentive pay - improving the bank's bottom line. Michigan Banker, Vol. 16, No. 9; Pp. 104-105.
Tahir, M. N., 2006, Subjective performance measures in bonus payouts. Performance Improvement, Vol. 45, No. 8; Pp. 34-40, 44.
Taleb, N., 2009, How bank bonuses let us all down. Financial Times, 24.
Tung, A., Baird, K., & Schoch, H. P., 2011, Factors influencing the effectiveness of performance measurement systems. International Journal of Operations & Production Management, Vol. 31, No. 12; Pp. 1287-1310.
