On August 28, 2009
The “Perverse” Incentives Caused by Guaranteed Bonuses
Stock options and grants were once the lure of choice used by companies to attract top talent. No longer, thanks to a dour stock market and regulatory scrutiny of stock option programs. Now it’s guaranteed bonuses that employers are using to bait the hook. Come work for us and we will guarantee you X salary, a Y bonus, and and maybe even give you additional bonuses based on how much business you generate. But any pay scheme that rewards employees for production while insulating them from downside risk motivates them to take careless, company-harming bets. That’s the argument made by Harvard professor Lucian Bebchuk in a recent Wall Street Journal op-ed. (Subscription required) “Guaranteed bonuses create perverse incentives to take…
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