Bonus or Bogus?

CNNMoney.com is reporting that the American International Group (AIG) made a surprising move on Wednesday to dramatically change the way it pays out employee bonuses.  From now on, (drum roll please) AIG will determine compensation based on performance!  Just to make sure you heard that clearly, they will now base their annual $100 million dollar executive bonus package on performance.  This remarkable change in philosophy leads us to an obvious question.  How in the world was AIG determining bonuses to begin with?  Based on the fact AIG still owes U.S. taxpayers $182 billion in bailout money, maybe CEO Robert Benmosche figured this was a way good way to reduce expenses.  After all, the company continues to underperform and armed with this new philosophy no one may be entitled to a bonus now.

To give AIG some credit, they finally figured out what the average Joe on the street already knew.  To quote AIG spokesman Christina Pretto, “Aligning pay and performance is the hallmark of many world-class organizations.”  This makes sense, because what most of us already know is that  rewarding people for a job well done typically increases motivation.  On the flip side, how motivated is a person who already knows, and expects, he or she will get a bonus no matter what they do?  Hey Bob, just for showing up today, you get a little something extra!  That sounds great if you are the employee, but it doesn’t exactly boost organizational performance.  Not to mention it isn’t fair for the people who truly are busting their humps.

It was Robert House who recognized these types of issues when he developed the Path-Goal Theory of Leadership.  According to House, leaders need to identify goals, clarify the path for people to follow, help clear obstacles and reward people for success.  The key to motivating people is to make sure they can clearly see the connection between their efforts and the rewards they receive.  Finding ways to be supportive, directing when necessary and allowing for participation in decision-making is also important.  But the most critical activity for the leader is to be achievement-oriented and recognize people for their efforts.  Even if you are not working in a Fortune 500 company with big bonuses to dish out, there are lots of ways to recognize people for a job well done.  So follow AIG’s “cutting-edge” approach and make sure you connect rewards with performance!