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Bonus-malus regulation

Motivating employees is the supreme discipline of employee management. But can a bonus/malus system help?

Motivating employees is the supreme discipline of employee management. But can a bonus/malus system help? The bonus itself has long since fallen into disrepute and, according to tongues, has also led to one or two economic crises. Is it time to bring out the heavy artillery and let a stern hand prevail? What is the effect of a malus scheme on target achievement compared to traditional bonus compensation? Let's take a closer look at that in this article:

The bonus compensation system is the more famous of the two compared to the malus scheme, and also the one often criticized - not because it is designed to compensate executives and top management with a variable wage in addition to the fixed wage, but because it is said to provide the wrong incentives. Moreover, this variable pay is said to be disproportionate to the performance delivered. On top of that, bonus compensation, from the employee's point of view, such as that of the sales department, is not designed to be fair.

That's why we want to talk about the bonus-malus scheme in more detail in this article.

Bonus compensation or a bonus-malus scheme?

Bonuses are therefore increasingly setting the wrong incentives, literally tempting people to engage in risky business that brings quick profits, but in the long term entails large losses. In this context, however, we are talking about the few managers sitting at the very top. Bonuses are also used in middle management. But here, too, the bonus has a negative effect - instead of motivating, a bonus can have exactly the opposite effect! So is this money given away?

But is a malus rule really better?

Well meant is not well done

Let's roll up the bonus story from the beginning. The bonus is paid to an employee, in addition to his fixed salary, at the end of an agreed period, provided that the agreed targets have been achieved.

So far, so good. The incentive to perform better seems to be there. But what is the problem?

The first problem, which has already been uncovered by various studies, is that the bonus recipient gets used to the bonus and it no longer represents an incentive, but rather a matter of course. Attempts are being made to counter this attitude of self-evidence by introducing a bonus-malus scheme.

But there are a number of other problems that arise in connection with bonuses and in the absence of a malus regulation: Namely, if the achievement of goals is not communicated with sufficient transparency, the bonus payment is perceived as unfair and arbitrary, and for some even unattainable. This leads not only to frustration among employees, but also to strong competition between team members.

This is why numerous experts also believe that a bonus-malus scheme can be superior to a normal bonus scheme and an exclusive malus scheme.

Reward gains, ignore losses

Outside of companies, there is also a widespread belief that profits would be rewarded, but loss would not be punished.

Therefore, the following question must arise for us:

Is there a way to design the bonus system in such a way that employee motivation is kept high while each employee is aware of his or her responsibility to the company and its success?

Perhaps the answer to this question can be found through a malus regulation, which is reflected in a sophisticated bonus-malus system.

But what does it mean to introduce a malus scheme?

The malus rule

This is where the idea of the malus scheme comes into play. The total amount of the wage does not change - only the time and method of payment.

So what is a malus scheme?

Whereas with a bonus a certain amount is added to the wage at the end of a period, with a malus an amount is deducted from the wage at the end of the period - but in return the employee receives a higher basic wage at the beginning.

Such bonus-malus systems are often used in practice.

An example - a bonus-malus system in practice

To illustrate how a bonus-malus scheme shapes up to a bonus-malus system, let's assume that an employee's salary is 100. His bonus in this example is 50.

His total wage under the assumption of a bonus scheme, if the targets are met, is 150 at the end of a period. In the case that the targets were not achieved, however, it is only 100.

Under a malus scheme, the employee already receives 150 at the beginning of the period under consideration. At the end of the period, the employee is not given any additional compensation if the target is met. However, 50 will be deducted if the employee does not achieve the target. This 50 is called the malus amount.

In both cases, bonus and malus, the employee receives exactly the same salary. In the first example, he is only paid his bonus and in the second his malus amount is deducted. When both approaches are combined, it is referred to as a bonus-malus arrangement.

Various studies have shown that people react more strongly to a sanction than to a reward, so avoiding a sanction is a greater incentive than the prospect of a reward. In practice, it has also been shown that more performance is required in order to avoid the occurrence of the malus rule and thus the deduction of the malus amount.

The practical test

This phenomenon has been carried out in countless field experiments, such as with teachers who were rewarded for their students' performance with the bonus-malus scheme or with smokers who were rewarded or sanctioned for quitting smoking.

The Malus System as the New Standard?

So why do companies use a malus rule relatively rarely? On the one hand, it is because a malus rule has a deterrent effect on employees and even more so on applicants. Especially in times when companies are trying to attract the best talent through bonuses and benefits, a company that uses a bonus-malus system with a strong malus rule would probably be eliminated right at the beginning in the race for qualified employees.

Next, there is also the question of the extent to which passing on business losses to individual employees in the course of a bonus-malus scheme is justifiable. After all, it is often not only the performance of the employees that is decisive for success, but also depends on external influencing factors.

And last but not least, one must not forget that, contrary to a possibly popular opinion, the bonus already takes into account performance and business results anyway. A bonus-malus scheme, on the other hand, would have to be completely rethought.

Encourage intrinsic motives

Performance-based compensation components can be an effective tool, but instead of considering only monetary incentives to increase efficiency, intrinsic motivation can also lead to outstanding results - because more and more employees long for meaningful and varied tasks. The opinion that work is merely a means to an end has long been outdated, and this is precisely where companies can start and properly motivate employees.

More information

In this guide, we explain how to properly motivate your employees.

EN Mitarbeitermotivation


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