Performance-based remuneration

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The term performance-based remuneration describes variable salary components that are paid based on performance . For commercial jobs we speak of performance-related pay and specialists and executives of performance-related pay or commission . The term “bonus” has established itself for high annual performance fees.

Performance-based remuneration as a motivator

The reason given for performance-related remuneration and incentive systems is usually that they create performance motivation . According to a study from 2011, the goals of introducing such systems are more diverse. In addition to motivation, an increase in productivity and an increase in identification with corporate goals are almost always intended with the introduction of variable salary components.

In principal-agent theory , performance-related pay is used to incentivize executives to run businesses for investors . This is achieved by making variable salary components dependent on goals that are suitable for increasing the company's success.

The motivational effect of performance-based remuneration is also questioned. Parts of motivational psychology, for example, argue that material incentives reduce the intrinsic motivation of employees (the so-called corruption effect ).

Performance measurement

A key problem of performance-based pay is the definition of suitable goals and performance indicators.

Goal definition

A distinction can be made between three types of objectives in performance-based remuneration systems:

  • Financial goals: Such goals depend on financial metrics .
  • Qualitative goals: Such goals depend on non-financial variables such as employee satisfaction, customer satisfaction, ecological goals and other goals.
  • Personal goals: Such goals depend on target agreements with an employee.

Targets for performance-based pay should be measurable in order to have a motivational effect. This is best guaranteed with financial goals. For this reason, qualitative goals are used less often.

When setting goals, a distinction must be made between individual and group goals . In many cases, team performance is decisive for success. Naturally, however, it is difficult to assign team success to individual team members . For this reason, individual targets for performance-related remuneration are predominantly used.

Most companies with performance-based compensation systems also use personal targets in their variable compensation. This is criticized by the representatives of Beyond Budgeting .

Organizations have more than one goal. For this reason, entire bundles of goals are typically specified for performance-based remuneration (e.g. costs, income, risks). This often leads to conflicting goals , which one tries to minimize with suitable instruments (such as a balanced scorecard ).

While the success of the entire company is the target criterion for executives at the top level (board members, managing directors), there is a conflict between the team or departmental goals and the interests of the entire company at lower hierarchical levels. In many cases, the variable remuneration is composed of elements that reflect the results of the company as a whole and those that are measured against the performance of the team or individual employees. Only the latter are performance-related payments in the narrower sense.

In addition to defining the target assessment base, another difficulty lies in determining the individual target amount. The agreement of the goals to be achieved in particular often harbors enormous potential for conflict in discussions between employees and superiors. There is a negotiation situation or specifications from the superior. Such an approach is counterproductive for the intended intentions of the remuneration system. In practice, systems are becoming more and more popular that involve employees in development at an early stage and, through their structure, avoid the conflicting goals described.

Performance indicators

A number of problems arise in measuring performance. The most important thing is the conflict between short-term and long-term target achievement. In the short term, for example, there is the possibility of apparently achieving goals by taking risks or not investing . In the long term, however, this approach implies damage and / or risks for the company. In order to avoid false incentives, target agreements or performance measurements are necessary that cover the time horizon desired by the company.

The agreed goals are often not measurable directly, but only with the help of auxiliary variables (e.g. a cancellation rate instead of customer loyalty ).

Value-based remuneration systems

Performance -oriented remuneration systems based on economic value added are called value-oriented remuneration systems. With value-based bonus systems, economic value added targets are set that remain constant over several years. Because this usually leads to large fluctuations in performance wages, a so-called bonus bank is used. The purpose of the bonus bank is to distribute bonus payments over several periods, so that the long-term orientation is increased and wage fluctuations are reduced.

Indexed bonus targets

Another methodology for smoothing bonus payments is to index the bonus targets.

Indexed bonus targets based on the operational index

Using the concept of indexed operational performance measurement, the economic value added targets for value-based bonus systems are adjusted up and down according to the market trend (see operational index ). This has the advantage that external influences on the attainability of the bonus target are neutralized.

Indexed bonus targets based on operational alpha

Using the concept of indexed operational performance measurement, bonus systems based on financial indicators such as sales , EBIT , cash flow or ROI or ROCE , RONOA (Return on Net Operating Assets) are converted to operational alpha of these financial indicators. The operational alpha of a key figure has the advantage that positive operational alpha values ​​always mean outperforming the market and thus represent good performance. This is not the case with classic financial ratios, even if they can have a positive value. However, if this positive value is below the market development, then the performance is poor and the positive value does not reflect the positive performance.

Indexed bonus targets based on operational rank

The third way of indexing bonus systems using the concept of indexed operational performance measurement is to convert financial ratios to the concept of operational rank. The operational rank of a key figure standardizes the financial figure in a percentile rank . This makes it possible to design bonus targets for individual business functions such as sales, production, administration without the problem that external circumstances unfairly influence the chances of target achievement for the individual functions.

Performance-based pay in the public sector

In the public sector in Germany there has been the option of performance-based pay since 2007. This was agreed in Section 18 of the collective agreement for the public service (TVöD) despite massive concerns from the unions.

Performance-based remuneration in medium-sized companies

Performance-oriented remuneration systems are meanwhile also widespread in medium-sized companies; there especially in larger companies. According to a study by the Cologne University of Applied Sciences and the consulting firm Milz & Comp. More than two thirds of medium-sized companies use performance-based remuneration systems, particularly in sales and production. Managers work more often with performance-based remuneration and are paid more variable remuneration than employees without personnel responsibility. The variable share in sales is often a third or more.

Performance-related remuneration in sales

Definition: Performance-related remuneration in sales is generally understood to mean the success-based remuneration of employees in field sales and internal sales. The variable and performance-related remuneration in sales should, on the one hand, motivate employees to be more committed, and, on the other hand, direct and control employee activities in terms of desired results (cf. Heinz-Peter Kieser: Variable remuneration in sales - 10 components for motivating remuneration in external and Back office, Wiesbaden 2012). In addition to the fixed income component (salary), the variable component is a performance-related remuneration element for achieving various specifications and goals.

Distribution Experts (Bertelsmann Stiftung study) estimate that around 90% of German sales representatives and around 60% of internal sales representatives are paid on a performance-based basis. It should be noted that the number of performance-related paid sales employees has been increasing continuously for years and that it has become common to include peripheral areas of sales such as product management, marketing and service in performance-based pay.

Amount of the variable income component The amount of the variable, i.e. H. The performance-based, remunerated portion of the income varies greatly from company to company. In the past, the highest possible variable income component was considered desirable in order to achieve maximum motivation and employee management in sales. However, this was limited by the case law of the labor court, which requires employees to be guaranteed predictable and reliable remuneration.

Performance-based compensation for investment bankers and board members

Particularly in the context of the financial crisis from 2007 in connection with excessive bonus payments, a debate about the appropriateness of the variable remuneration systems in the financial sector and in the management of other large commercial enterprises became the focus of public interest. After the G20 countries had agreed on principles for the design of appropriate systems in the course of 2009, the German BaFin also published such principles in a sample letter. As a result and under pressure from politics and the public, Deutsche Bank, Commerzbank, HypoVereinsbank, DZ Bank, WestLB, LBBW, BayernLB, HSH Nordbank and the insurance companies Allianz, Talanx and Münchener Rück, among others, publicly endorsed these principles ; the companies promised to adapt it as soon as possible.

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  1. ↑ Sabine Meinert: Performance-oriented salaries pay off . Financial Times Deutschland Online. Link ( Memento from February 3, 2012 in the Internet Archive )
  2. ↑ Neue Zürcher Zeitung, March 13, 2009: Fixed wages as an alternative to bonuses and sophisticated incentive systems
  3. ^ A b Hermann J. Stern , Simon Peck: Executive Compensation Switzerland - Trends in remuneration structures for executives . Obermatt, 2003, ISBN 3-033-00971-9 .
  4. ↑ Markus Milz, Stefan Wolff: Set the "correct" limits . In: Sales Business, Edition 12/2011 p. 28 ff
  5. ↑ Stephen F. O'Byrne: EVA and Value Based Management. MacGraw-Hill, 2000.
  6. ↑ Stephan Hostettler, Hermann J. Stern : The Value Cockpit . Wiley-VCH, 2004.
  7. ^ Hermann Stern: Making Bonus Systems Fair and Crisis Proof. March 11, 2009. Article as PDF in SSRN and Hermann Stern: A bonus in the recession? - Yes, provided it is market-oriented! In: CFO Aktuell, December 2008 ( article as PDF ( memento of the original from October 11, 2014 in the Internet Archive ) Info: The archive link has been inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. ). @1@ 2Template: Webachiv / IABot / www.obermatt.com
  8. ↑ Karin Tondorf: Performance-based remuneration: operational implementation of § 18 TVöD using the example of municipalities ( [1] ).
  9. ↑ Markus Milz, Stefan Wolff: Performance-oriented remuneration in medium-sized manufacturing companies . KDP, 2012.
  10. ↑ Consultation 14/2009 (BA) of December 1, 2009 - Requirements for remuneration systems ( Memento of the original of July 5, 2010 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. (PDF). @1@ 2Template: Webachiv / IABot / www.bafin.de
  11. ↑ Die Welt: These German banks are regulating the bonuses anew