Bonuses are a regular occurrence in businesses. The top executive of JDE Peet's now stands a chance of a €60.5 million bonus if he meets certain targets. Robert Dur, Professor of Economics of Incentives at Erasmus School of Economics talks to NPO Radio 1 about the effects of these bonuses.
Normally, Dur researches ordinary employees. With CEO bonuses, he says, it is more difficult to indicate what a reasonable amount is for a bonus, since there is no well-founded formula. Dur does indicate, however, that a bonus can quickly end up too high. This is then mainly due to the leapfrog effect between companies. The commissioners who set the bonus are advised by people who look at comparable companies. Often, they then take it up a notch. Then other companies do the same again, making it an incremental race with no end in sight.
The way bonuses are designed can be a bad choice. A bonus aimed at the short-term, in turn, can be bad for the company in the long term. Other aspects that shareholders consider important should also be considered, such as sustainability. However, this is then often factored into the objectives underlying the bonus.
Coincidence in bonus payments is also a not unimaginable situation. Market developments can work nicely in a CEO's favour, without having worked much on the objectives. According to Dur, this risk can be countered by benchmarking, for instance. In the Netherlands, larger bonuses do occur more often. He indicates that it might be time for politicians to be more active in this area. However, this does not mean that politics should sit on the commissioner's chair.
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You can watch the full broadcast of NPO Radio 1, 5 December 2024, here.
