Bonuses for senior executives in the banking sector should only be Essay

Bonuses for senior executives in the banking sector should only be paid for genuine excellence - Essay Example For example, a Sales Director will earn bonuses if turnover targets are met and exceeded (Nkomo, Fottler and McAfee, 2010: 85-93). Recent years have been characterized by an outcry against paying of bonuses to senior corporate executives. This is mainly due to malpractices by top executives to ensure they earn high salaries with little regard to how the company is performing or stockholder value. These malpractices include accounting fraud. Bonuses remain popular with firms because in today’s world of heightened competition and reduced profitability, bonuses represent a variable rather than fixed cost (Murphy, 2005: 110-117). It is also widely believed that bonuses create motivation, which leads to organizational performance. Bonuses help to attract and retain managerial talent and motivate executives to perform to the best of their abilities and prevent executive dissatisfaction. It has been argued that rather than incentivizing executives to raise shareholder returns, bonuses have been turned into rent-seeking avenues by self-interested executives. This defeats the main logic behind paying of bonuses, which is to tie executive pay closely to organizational performance (Kieff and Paredes, 2010: 44-49). At the same time, it has been argued that executive bonuses affect firms negatively. Performance-based bonuses foster individualism, business aggression and uncertainty. Bonuses create competitiveness among the executives which hurts cooperation. Bonuses encourage executives to take unreasonably high risks and make short-sighted decisions that may not be good for the firm’s long-term prospects. It is also argued that senior executives spend a great deal of time and focus on their past and expected bonuses than on the returns of shareholders. Bonuses also foster bad relations and resentment between the executive and the lower ranking staff (Marchica, 200 4: 8-15). Bonuses are rooted in two theories; the Expectancy theory and Agency